Trade Finance
What is ‘trade finance'? It is a service that is offered to mainly growing and profitable businesses to increase their working capital needs so that they are able to finance their operating cycle. Because of trade finance, these companies are able to purchase goods from their suppliers to meet their customer commitments. The finance is available for the entire cycle – that is right from the time the order is procured to payment made for all inputs and until the time payment is received from the customer. The company can thus allocate its financial resources for other purposes and can plan its operations better.
Companies are known to leverage trade finance to their benefit throughout the year on an on-going basis for various projects or for one-off assignments.
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However, trade finance is not only about the financial needs. It is also about managing various kinds of risks such as political risks, natural calamities and performance risks.
What do trade financers look for before approving the funds?
They actually look at a number of things. Like…
- Whether the company that is seeking the finance has enough experience or not.
- The balance sheet of the company to analyze its financial health.
- Ability of the company to obtain title of the goods.
- Whether the company has confirmed orders in hand or not.
- The financial health of the customer that is the payer.
- The companies credit history.
Advantages of trade finance
- Working capital need is met.
- Since the financer is ready with the cash, the company need not dig deep to arrange for the additional financial resources.
- With a successful deal that is when the financer gets his money back from the customer, the credit rating of the company is increased.
- The company can plan to take up bigger projects, which it would otherwise not have done due to financial restrains.
- Can gain competitive advantage as suppliers can be paid off quickly.