Trade Finance is the financial assistance provided for trading transactions locally and internationally, through various financial products.
In simple terms, Trade Finance is the funding and support provided to conduct trading activity. Trade Finance is mainly sanctioned by Banks or other Financial Institutions.
Types of Trade Finance:
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Working Capital is the difference between Current Assets (Cash + Inventory + Accounts Receivable) – Current Liabilities (Accounts Payable + Short Term Borrowing + Accrued Liabilities).
It is essential to study the operational cycle from procurement of raw material/inventory till payment to the suppliers, i.e., from the point at which the company procures raw material till the payment is received on sale of goods and payment is made to the suppliers. The number of days taken in this conversion cycle is very relevant for the analysis of working capital. Based on this analysis, the finance team can identify the working capital gap and plan to source the fund to fill the gap.
A term loan is an advance received from the bank which has to be repaid in a specific number of instalments. Term loans charge a rate of interest, either fixed or fluctuating, which has to be paid along with the fixed instalment. Businesses generally avail Term loans for the purchase of fixed assets. Term loans can be categorized based on the tenure of the loan as Short Term Loan, Intermediate-Term Loan, and Long Term Loan. A Term loan can also require collateral to reduce the risk of default of payment.
Documentary Credit, commonly called Letter of Credit (LC), is an irrevocable undertaking issued by a bank whereby the bank undertakes to make payment to a beneficiary provided documents as per the LC are presented, and all terms and conditions are complied with. In an International Trade, the Exporter and the Importer use an intermediary such as a bank to guarantee the payments and delivery of goods, due to factors like distance, uncertainty on the genuineness of a party, etc. In case the buyer is unable to make the payment, the bank will be required to cover the full amount.
Invoice Discounting: Invoice discounting allows a business to immediately receive a part of the raised invoice amount on presenting the invoice and the balance is received after the payment is received from the customer. Invoice Discounting helps obtain funds immediately, which will increase the Cash Flow of the business. In a normal scenario, this facility is customer-specific and as per the Bank policy with the customer. The bank will look at the payment capacity of the customers, the trustworthiness of the borrower, and further security before discounting an invoice.
Cheque discounting: Cheque discounting is a facility provided by the bank wherein the bank finances the transaction and provides funds before the due date of a PDC issued by a customer. Through this arrangement, the supplier gets the payment immediately allowing the customer to enjoy a credit period to make payment.
Bonds or Guarantees are facilities extended by a bank that provides the buyer security in case of failure by the seller to settle the obligation. The buyer receives compensation from the bank when the seller fails to deliver the ordered goods. These are mainly used in the Construction industry or for specific projects. The different types of bonds or Guarantees based on ‘on-demand’ and ‘conditional’ classes include Tender Bond, Performance Bond, Advance Payment Bond, Retention Bond, and Payment guarantee.
Trade Finance in Ghana will help the business grow by getting financial aid from banks and other financial institutions, which is required to conduct the business activities of a trading company. Trade Finance will support those businesses which do not have enough Cash Flow or Working Capital to meet the business needs. Trade Finance will also give relief from a cash crunch, extended credit period of customers, and blocked funds on unsold inventories, to a certain extent.
Trade Finance in Ghana will help a business to offer a more competitive price and terms to the Suppliers and Customers by ensuring guaranteed payment to the suppliers in time, based on certain pre-agreed conditions. It will also support the business from cash constraints or liquidity gaps by providing the options of Terms loan, Overdraft, Customer Invoice discounting, etc. Trade Finance will allow businesses to procure inventory in bulk quantity, thereby providing the business benefits of negotiation and high-quantity discounts which would result in an increase in profitability. Trade Finance also helps the business to build a strong Supplier/Customer relationship as the payment risk is minimized to the maximum extent.
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