The non availability of an adequate trade finance infrastructure is in itself a barrier to trade. Limited access to financing, high costs and lack of insurance or guarantees are likely to restrict trade and export potential of an economy, particularly small and medium enterprises. One of the most important challenges for traders involved in a transaction is to secure financing, so that transaction can actually take place.
Trade Finance Instruments
- Letter Of Credit
- Factoring
- Pre Shipping Financing
- Post Shipping Financing
- Buyer's Credit
- Suppliers Credit
- Leasing
- Inventory Financing
Letter of Credit
- A Letter Of Credit is a Financial Instrument wherein the importer's bank extends credit to the importer and takes up responsibility in paying the exporter.
- Once the concerned documents are received, the bank issuing the Letter of Credit will make payment immediately or at a later accepted date. The documents would have details pertaining to shipping, insurance and commercial invoices.
Factoring
Factoring involves the discounted sale of accounts receivable or other debt assets either on a daily, weekly or monthly basis in exchange for immediate cash.
Factoring involves the discounted sale of accounts receivable or other debt assets either on a daily, weekly or monthly basis in exchange for immediate cash.
Pre Shipping Financing
- Before the shipment of goods.
- Provide assistance for pre export activities like wages and overhead costs.
Post Shipping
- It is the time after shipment.
- Assure adequate liquidity till the purchaser gets the products and the exporter gets payment.
Buyer's Credit
In the exporting country a bank extends a loan directly or indirectly to a foreign buyer to fund the purchase of goods and services from the exporting country. This ensures the buyer makes payments to the supplier as per the contract.
Supplier's Credit
It is a financial instrument under which an exporter extends credit to the buyer in the importing country to fund the buyer's purchases.
Leasing
- It is usually a midterm to long term financing.
- Importer leases the product intended from the banks.
- The banks would sign a leasing agreement directly with the importer (lessee).
- The agreement is structured to the particular needs of the supply contract between the exporter and importer.
Inventory Financing
- Inventories take up space and are a cost to the exporter till they are shipped to the importer.
- Warehouse receipts-These are a source, provided they are funded through both secured and unsecured loan in counter to the inventories a company possesses.
Export Credit Insurance
It involves insuring the exporters against probable:
- Commercial risk like non acceptance of goods by buyer, the failure of buyer to pay debt and the failure of foreign banks to honor documentary credits.
- Political risks due to war, riots, stoppage of foreign exchange transfers and currency devaluation.
Export Credit Guarantees
- They are issued by a financial institution or a government agency.
- Help companies which do not have proper track records to obtain credit from banks.
- They are instruments to protect export financing banks from losses that could occur after providing finance to exporters.
