“The goal of a successful trader is to make the best trades. Money is secondary”, Alexander Elder.
Trade Finance is the financing of goods or services in a trade or a transaction, from a supplier through to the end buyer.
Generally, trade finance supports trade, contract and project financing.
Trade Finance entails a variety of financial instruments/ facility structures that can be used by an importer or exporter or contractor.
These structures include: Pre-import and post-export Finance, Structured Commodity Finance, Invoice Finance (Discounting & Factoring), Supply Chain Finance (Supplier, buyer, factor), Letters of Credit (LCs) and; Bonds & Guarantees (Bid bonds, performance guarantees, advance payment guarantees, bank guarantees etc).
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.
Trade finance is a tool which is used to unlock capital from a company’s existing stock or receivables, and add further finance facilities based on a company’s trade cycles.
This supports the firms to scale up operations and manage business risks.
In addition, a trade finance facility may allow the business to offer more competitive terms to both suppliers and customers, by reducing payment gaps in your trade cycle.
It is beneficial for enhancing the supply chain relationships and enables the businesses to grow, as they sweat their limited working capital.
As a matter of enhancing medium-term working capital, trade finance uses the underlying products or services being imported/exported as security/collateral.
It increases the revenue potential of a company, and earlier payments may allow for higher trade margins.
Trade finance allows companies to request for higher volumes of stock or place larger orders with suppliers, leading to economies of scale and bulk discounts, which businesses would not have afforded without this leverage.
Of late, many exporters prefer part advance payments that can be arranged by bankers as a pre-import structure.
Indeed, Trade finance can also help strengthen the relationship between buyers and sellers, increasing profit margins.
It allows a company to be more competitive, working outside the realms of the business liquidity, and with non-collateralized credit.
Well, managing the supply chain is critical for any business.
Trade and supply chain finance helps ease out cash constraints or liquidity gaps for the suppliers, customers, third parties, employees or providers.
Earlier payments also mitigate risk for the suppliers. 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 stress by effectively financing trade streams.
It is important 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 to scale.
Due to the embedded risk mitigants that surround trade finance lending and instruments, there is comfort to actors. This leads to the possibility of a diversity of supplier base for trading companies.
A more wide-ranging supplier network increases competition leading to a better supply cycle, and efficiency in markets and supply chains.
All in all, the bankers are apt to structure the appropriate solutions for your business and trade cycle to mitigate all the business risks, through a cocktail of trade finance services.
“It is usually people in money business, finance and international trade that are really rich”- Robin Leach.
The writer is the General Manager- Commercial Banking at Centenary Bank
