• Trade Finance

    Trade finance or trading loan is any financing that is provided for the purpose of conducting domestic and/or international trade between a buyer and a seller. Banks and financial institutions can be the providers of such financing and thus allow the transaction.

    This kind of financing may allow an extra level of protection to the buyer and a quicker access to the funds generated by the transaction for the seller. There can be a few specific types of loans that are based on or provide support to traditional trade loans. Such can be documentary collection, trade credit insurance, factoring and forfeiting.

    Types of Products offered under Trade Finance

    A trade finance or trading loan availed from most banks will normally have one or all of the following products and/or services –

    1. Letter of credit – An undertaking or promise given by the buyer’s bank to the seller that if the latter presents pre-specified documents to the buyer’s bank regarding a transaction as per a purchase agreement, the buyer’s bank will make a payment to the seller
    2. Bank guarantee – An undertaking or promise wherein a bank stands guarantee on behalf of an applicant in favour of a beneficiary. If in case the applicant fails to deliver to the beneficiary on pre-specified terms or agreement, the guarantor bank will make a payment to the beneficiary upon receiving a demand or a claim. The different types of bank guarantee can be mentioned as follows –
      • Tender Bond
      • Advance Payment
      • Performance Bond
      • Financial
      • Retention
      • Labour
    3. Bill Collection and Discounting – Herein, the seller’s bank collects the payment from the buyer or buyer’s bank for the goods or services purchased

    Benefits of Trade Finance

    • This type of financing scheme helps businesses handle international transactions seamlessly.
    • Customers can electronically process export and import documentary credits, guarantees, and collections.
    • Using this scheme, business owners can pay their client upfront, irrespective of their geographical location, without having to spend any money at the moment. Borrowers can repay the debt later to the concerned financing organisation within the predetermined period of time.
    • Businesses have the option to pay their suppliers using their local currency to reduce any currency risk that may come up later.
    • The greatest benefit of this scheme is that it guarantees security on the payments made to a supplier and helps improve the borrower’s relation with them.
    • The finances under this scheme are usually covered under an insurance policy.
    • This financing scheme helps improve the cash flow within a company by offering the required credit while helping it manage its trade cycles without impacting business relationships.
    • Using trade financing, the borrower can focus on its growth activities.

    Points to Remember Before Choosing Trade Finance

    • Since this type of financing method is majorly based on the past operations and credit history of the company, it can be difficult for new companies to avail this benefit.
    • This scheme can turn out to be extremely expensive if the borrower fails to make timely repayments.

    Eligibility Criteria and Details for Trade Finance (Trade Loan) Options in India

    Globally, eligibility criteria for availing a trade finance remains more or less the same. Since it is a loan by all means, most of the regulations and requirements of a conventional trade finance remain standard. Based upon specific banks, additional criteria might come into play, but on an average, the following conditions, if met, qualify a customer to avail a trade loan without any hassle –

    1. Age – As with any kind of loan, the interested customer must be of legal voting age or above and allowed to conduct business, either in partnership or proprietorship
    2. Business Age – The minimum years required for a business to be functional varies from bank to bank, but could be anywhere between 2 years to 4 years

    A few of the necessary details that are common to most trade finance schemes are mentioned below -

    1. Loan Limits – These again vary with differing banks, lower limits being close to INR 15,000 to INR 30,000. The upper limits could be decided as per the need of the customer and the limits set by the bank. Generally, a maximum of INR 2 crores to INR 3 crores can be approved
    2. Loan Tenure – Tenures for repayment of the loan can be as high as 60 months and can be as low as decided by the customer or permissible by the bank
    3. Loan Security – Most banks will allow securities in the form of mortgaged land (excepting agricultural land), National Savings Certificates, government bonds or fixed deposits with the bank. Some banks might also accept life insurance policies in the name of the borrower, partner, proprietor or director as security
    4. Margin on Loans – Based on the security provided, the margin allowed by different banks could vary between 5% to 45% of the provided security

    Documentation required for availing a Trade Loan

    Being a Secured Loan, there are specific documents that need to be furnished for a borrower to avail a trade finance scheme without any hassle. The most common documents required while applying for a trade loan are as follows

    1. Balance sheet/profit-loss statement for the past 2 to 3 financial years
    2. Declaration of annual sales along with tax returns
    3. Assessment of sales tax/income tax
    4. Stock statements
    5. Proof of insurance of premises and/or stock

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