Trade Finance Methods & Types Explained in Detail
Trading finance is basically the funding of financial assistance that is provided to businesses worldwide by the means of financial tools. International trade finance in itself is like an umbrella, under which a variety of financial products exist. All of them are structured to ease up how a business is executed for traders globally. As with all wings of business, trade finance has also gone through a series of upheavals because of the crisis faced by the world.
The end result is disruption of costs, increased rules and regulations on both exports and imports not just globally but also domestically. This is why a career in finance has always been sought after in this country.
The only way to do it is to get enrolled in banking courses in India after graduation. Imarticus Learning provides a solid solution for it in the form of their PG program.
Coming back to trade finance, managing supply chain and suppliers is one of the most important things to trade finance. The reason is most of the trading around the world happens as a result of a merging of both pre-export and post-export finance tools. There are a few types of trade finance that need to be addressed here. Such as:
It is basically a pre-export type of trade finance that requires full payment from the importer even before the items are delivered. It, unfortunately, runs the risk of undelivered items on the buyer's side and credit risk on the supplier's side.
Business loans or working capital loans are funded by banks or funding organizations. They are basically used to afford the upfront short-term costs of a business. From raw materials to labor costs, these things are funded through a business loan. They are short-term loans and company assets are kept as a warranty of repayment.
Letter of credit
It is easy to use and mostly available in current accounts of businesses. It permits a business to overdraw with terms and conditions applied by the funder. It is simple and flexible to use, however, credit lines do get extended because of it. The only thing to worry about is making sure that the company does not get charged with a peak interest rate.
Factoring in invoice
It is a post-export type of trade finance that depends on receivables. It is used to free up working capital by using invoices to optimize a balance sheet. It ensures about 80% immediate payment and depends on short-term receivables. The buyer pays the funder, the supplier receives. Then they receive the remaining balance provided by the funder after the discount is deducted.
It is also based on receivables and the way to distinguish it from factoring is by the time period of the financing. Basically, a virtual deduction of risks takes place by the supplier after the buyer receives the items. The receivables are supported by the buyer's funder, permitting the buyer to withdraw the exchange from the balance sheet. Which in turn, backs up the financial ratios.
Trade financing can be used as a tool to lessen the risk factor that comes with a trading business. The only way to do it is with proper finance tools, which need a proper skillset. Enrolling in banking courses in India after graduation would be a good idea if you want to get into financing. A lot of institutes offer PG degrees in finance in India, such as Imarticus Learning's PG program.