TRADE FINANCE PRODUCTS
In addition to working capital financing, small and medium enterprises (SMEs) that are involved in domestic and international trade may also apply for related financing from financial institutions.
Some of the common trade financing facilities provided by banks includes:
1.Letter of credit LCs
For import or local purchases of goods, materials or equipment.
A written undertaking by a financial institution to pay a seller a given amount of money subject to the following conditions:
- On presentation of specified documents as set out in the terms and conditions of the LC
- Within a specified time limit
- At a specified place
- Assures payment is made to the beneficiary
- Able to obtain a lower purchase price of the goods and longer payment terms
- Documents presented will be examined by trade financing specialists
- Less communication with the foreign seller as the whole transaction will be routed and handled by the bank
2.Bills of exchange
As a means of working capital financing for exporters.
Financial institution may purchase customers’ outward bills for collection and the customers’ account is credited immediately with the proceeds.
- Able to obtain immediate funds upon presentation of necessary documents
- Able to improve cash flow of the business since SMEs can obtain immediate funds from the bank
To extend credit facility on bills drawn under the financial institution’s own LC.
Enables a customer to accept delivery of their local/foreign purchases prior to payment of the sight bills being made by them.
- Enables the customer to pay the seller promptly
- Enables the customer to take delivery of the goods without paying for it immediately
- Able to ease cash flow
4.Foreign Currency Contracts
Generally for businesses that regularly import or export in foreign currencies with a credit standing that is acceptable to the financial institution.
The buying and selling of foreign exchange on a spot or forward basis, in respect of foreign proceeds or payments to be made at sight or at a future determinable date.
- Customers can fix their exchange rates for purpose of costing/hedging
- No further exposure to exchange risk fluctuations especially in volatile markets
Financing of a bona fide trade such as export,import or domestic trade transaction.
A draft drawn by customers to their order, payable on a specific future date and accepted by the financial institution.
- Provides cash flow before proceeds for sale of goods on credit can be collected or to finance purchases of raw materials for production
- Can be sold at the prevailing market rate should the customer need immediate funds
- Provides two-way financing