Trade Finance

Trade Finance

So, you found yourself here not by chance but as a result of your intentional choice. Welcome to Business Kinetics Trade Finance Hub where we shall provide you with insights into trade finance to increase your imports and exports. We shall also acquaint you with the latest research, information and happenings on trade finance.

What is Trade Finance?

The term, ‘trade finance’, generally refers to the financing of the fluctuating working capital needs for either single or bulk trade transactions from the supplier to the end user. This financing should, in principle, be self-liquidated through the cash flow of the underlying transactions.

Typical trade finance lending is often secured by the export goods and/or future receivables or other trade debt instruments such as bills of exchange; thereby assuring any external lender that the incoming cash flow will first be used for repayment of any outstanding debt before being released to the seller. This self-liquidating aspect of trade finance is generally more secure for the lender (compared to other forms of working capital facilities) and could therefore facilitate a higher lending ratio and often better terms than would otherwise be applicable.

Trade Finance is a broad term which includes a variety of financial instruments and products that are used by importers or exporters as well as companies, to facilitate international trade and commerce.

These include:

• Pre-shipment finance
• Own fund/Credit Limits
• Supplier credits.
• Invoice discounting
• Forfaiting/factoring
• Buyer Credits
• Export leasing.
• Export lines of credits
• Local currency finance
• Project Finance
• Joint Ventures
• Development banks.

The terms, Import Finance and Export Finance, are used interchangeably with Trade Finance.

Benefits of trade finance for your business
Trade finance facilitates the growth of a business by securing funds required to purchase goods and stock. Managing cash and working capital is critical to the success of any business.

In the same vein, trade finance is an instrument which is used to unlock capital from a company’s existing stock or receivables, or add further finance facilities based on a company’s trade cycles.

Furthermore, a trade finance facility provides opportunity to offer more competitive terms to both suppliers and customers, by reducing payment gaps in trade cycle. It is beneficial for supply chain relationships and growth.

 Other benefits of trade finance

• It provides short to medium-term working capital. In this case, the underlying products or services being imported/exported will be used as security/collateral.
• It increases the revenue potential of a company, making earlier payments to supplier give room for higher margins.
• Trade finance allows companies to request higher volumes of stock or place larger orders with suppliers; thereby leading to economies of scale and bulk discounts.
• Trade finance can also help strengthen the relationship between buyers and sellers; thereby increasing profit margins and giving room for healthy competition among companies.
• Managing the supply chain is critical for any business. Trade and supply chain finance helps ease out cash constraints or liquidity gaps – for suppliers, customers, third parties, employees or providers. Earlier payments also mitigate risk for suppliers.

It is pertinent to note that trade finance focuses more on the trade than the underlying borrower i.e. it is not balance sheet led. Therefore, small businesses with weaker balance sheets can use trade finance to trade significantly larger volumes of goods or services and work with stronger-end customers.

Due to the entrenched risk mitigants that surround trade finance lending and instruments, it gives opportunity for the trading companies to deal with a diversity of supplier base. A more diverse supplier network increases competition and efficiency in markets and supply chains.

Companies can also mitigate business risks by using appropriate trade finance structures. Late payments from debtors, bad debts, excess stock and demanding creditors can have detrimental effects on a business. External financing or revolving credit facilities can ease this pressure by effectively financing trade flows.