Trade finance services are provided to an importer to avail a short term funding against the goods or services that they want to avail from an overseas supplier. There are different means of achieving this service. Some of the advantages of trade finance service which in turn helps in improving the business are –
Prepay the overseas supplier – often the supplier is worried about receiving the payment especially when the buyer is far away in another part of the world. This risk in the payment makes the supplier wary of shipping the products. But with trade financing, the assurance from the intermediary – financial institutions, of receiving the money once the relevant documents are submitted has enabled the supplier to increase their sales. For the buyer also, the tension of paying an advance amount to the supplier is taken care of and the buyer can use the funds elsewhere instead of paying to the supplier.
Funding gap between order and payment – the trade financing service enables the buyer enough funding gap from the order that is placed to products that are received and then the payment to the supplier. When trade financing isn’t availed, the buyer should ideally make a partial advance payment to ensure the seller that his order is genuine and seller also needs an assurance that once the products are received, the payment in full will be made to them. Through trade financing, this gap between order being placed and payment received is taken care of.
Lower cost of short term borrowing when compared to Rupee loans – the interest rate arbitrage between two economies make the trade financing feasible. As the borrowing in local currency gets expensive with higher interest rates, the same is cheaper from a foreign land. Short term rupee loans are at high rates of interest. Thus import financing or trade financing introduces a market where funds are available at LIBOR linked rate, which may sometimes be one third the cost of local rupee loans.
Increases cash flow for both buyer and supplier – firms which have availed the trade finance service can make secure payments upfront for newer business opportunities thus giving them an upper hand in negotiating better rates from these potential investments. Both buyer and the seller need not pay or wait for funds on payday and pay or receive money in their accounts when due.
Funds can be used for growth into businesses – if trade financing is availed the flexibility increases to capitalize on the growth opportunities which can be done without constraining the cash flows. These growth opportunities demand capital and if not infused at the right time may miss the chance of long term growth.
Reduces hassles of sourcing finance – the process of availing finance is cumbersome and time consuming. It requires a dedicated resource to watch out right financial institution to seek loan. Sometimes depending on past history, the loan amount requested is not fully given. All this leads to unnecessary hassles of sourcing finance. The trade financing team assists in sourcing competitive interest rate from more than 50 banks to arrive at best rate depending on the product, tenor, country, etc.
Read more about export and import finance
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