Trade finance is quite different from the outdated methods of banking. It includes the financial products used to enhance international trade and commerce. However, fintech experts are taking measures to enhance the salary solution around the world.
A wide plethora of financial products falls under the category of international trade finance. However, trade finance is specifically designed to ease the financial hurdles of the international importers and exporters. Catering to a fact that financial products are like a treasure for the corporate sector.
In other words, it is a wide umbrella that covers various products used by different companies and banks to make trade and finance easier. Different products fall within the category of trade finance. Each product comes along with different benefits:
Types Of Trade Finance:
- Term Loans
One of the most common products of trade finance is term loans. As the name implies, term loans are borrowed by a company or organization. However, the borrowed amount is repaid in multiple episodes or installments. Therefore, the standard period to return this amount is nearly 10 to 12 years.
Whereas, in some cases, the repaying time can be increased upto 30 years – depending upon the demands of financers.
There is no concept of term loans in the financial world without a certain amount of interest on it. So, with the concept of bearing interest on the loan, it is quite understood that banks and other financial institutes provide such types of loans.
- Cash Credits
Cash works as fuel for the corporate sector. Various types of credit are aligned to finance international trade. Cash credit is one of them. Cash credit is a major aspect for the importers and exporters. This works like a credit line for them and helps them get money whenever they want.
Sufficient balance is a must-have for businesses to operate successfully and generate profit recently. On the other hand, in case of insufficient balance, businesses can borrow cash from this credit line at any time.
However, the amount must be compensated as soon as the company receives funds or payments to avoid high interest and sedate financial loss in the future.
- Letter Of Credit
If a company requires a loan from the bank, a letter of credit is one of the best ways to get finance. In addition, the letter of credit can work as a trump card to get a business loan.
Banks provide loans on the letter of credit because there is inborn security in a confirmed LC that the issuing bank will make the payment in case of default.
To become the focal party under the letter of credit, the receiver must provide all the important documents concerning the valid terms and conditions.
Business assets are no less than a treasure for an enterprise. Insurance is a backbone necessary in case of loss, as it helps in compensating the loss faced by the company. However, export insurance provides security against shipping, delivery of goods or products, and payment.
The insurance services providers play a role that is almost similar to the role of banks. The major services offered by the insurance officers include a letter of credit, terms loans, receivables and payable finance, and asset-based lending.
Pros Of Trade Finance
In a very short time, the trade industry has gradually taken over conventional methods of banking. The following are the most highlighted benefits of trade finance:
- The risk of financial hardships is decreased
Trade finance works as a backbone for the corporate sector. The company or the business might fall into pieces without trade finance solutions, services, and products.
Modernized features like spinning the credit amenities and factoring account receivables lend a helping hand to the companies in making international transactions with ease. But, on the other hand, it also is a great help for the business in case of financial ruckus.
- Increase revenue-generation
Running a successful business, generating revenue, and making a profit can be challenging for the business. However, with trade finance, companies have greater opportunities to increase the annual revenue and profit as well.
- Cash flow is improved
Revenue and profit generated by companies are no less than a treasure for them. The amount entering and exiting the company is known as cash flow. However, a healthy cash flow is a positive cash flow in which the received amount is more than the monthly expenditure.
However, with trade finance, businesses and enterprises can efficiently receive cash payments in factoring.
Also, the risk of nonpayment or non-receipt of goods is highly decreased through the letter of credit. This improves the cash flow of the company.
In a nutshell
Trade finance is an effective way for the corporate sectors to get loans and finance. There is no doubt that trade finance has made business easier, decreasing the risk of being bankrupt for business owners. However, as most of the process is based upon paperwork, more than 60% of document and money laundering frauds.
On the other hand, trade finance is a great help for the business in improving their cash flow and increasing their annual revenue rate.