Trade Finance

Trade Finance in Dubai UAE

Trade finance refers to the financial support offered for trading transactions both domestically and abroad through a variety of financial instruments. Trade finance is simply the money and assistance offered to carry out business transactions. Banks and other financial institutions are primarily responsible for approving trade finance.

Types of Trade Finance

• Working Capital Facility/Loan
• Term Loans
• Letter of Credit
• Receivable Discounting (Invoice Factoring/ Invoice Discounting/ Cheque Discounting)
• Bonds or Guarantees

Working Capital

Working capital is the difference between current liabilities (Cash + Inventory + Accounts Receivable) and current assets (Accounts Payable + Short Term Borrowing + Accrued Liabilities).

In other words, from the time the company purchases raw materials until it receives payment from sales of its products and pays its suppliers, it is crucial to understand the operating cycle from raw material and inventory acquisition through supplier payment. For the examination of working capital, the number of days required for this conversion cycle is crucial. The finance team may identify the working capital shortfall based on this research and plan to source the funding to close it.

Term Loans

A term loan is an advance from the bank that must be paid back over a predetermined number of payments. Together with the fixed installment, term loans require a rate of interest that is either constant or changing. Term loans are typically used by businesses to buy fixed assets. According to the length of the loan, term loans can be divided into three categories: short-term loans, intermediate-term loans, and long-term loans. Collateral may also be needed for a term loan in order to lower the risk of payment default.

Letter of Credit

Documentary credit, often known as a letter of credit (LC), is an irrevocable commitment made by a bank to pay a beneficiary if the beneficiary presents the required documents and the LC's terms and conditions are met. Due to variables like distance and ambiguity about a party's sincerity, the Exporter and the Importer in an international trade use an intermediary such as a bank to guarantee the payments and delivery of goods. In the event that the buyer is unable to pay, the bank will be obligated to cover the entire sum.

Benefits of Letter of Credit

To the buyer

• Non – Fund based facility
• Interest-free financing option

To the seller

• Minimizes Credit Risk
•  Avail pre-shipment finance against the LC
• Timely receipt of money

Receivable Discounting

Discounting of invoices: Discounting of invoices enables a firm to collect a portion of the increased invoice amount upon presentation of the invoice and the remaining portion upon receipt of the customer's payment. The ability to quickly receive funds through invoice discounting will improve the company's cash flow. This facility is often customer-specific and in accordance with the Bank's agreement with the customer. When discounting an invoice, the bank will consider the clients' ability to pay, the borrower's creditworthiness, and additional security.

Check discounting: A facility offered by the bank entails financing the transaction and supplying monies in advance of the due date of a PDC issued by a client. With this agreement, the provider receives the money right away, giving the customer a grace period to pay.

Bonds or Guarantees

Bonds or guarantees are services provided by a bank that give the buyer security in the event that the seller is unable to fulfil their contract. When the seller fails to deliver the ordered items, the customer is compensated by the bank. They are primarily utilised for specific projects or in the construction industry. Tender Bond, Performance Bond, Advance Payment Bond, Retention Bond, and Payment Guarantee are some examples of the various bonds or guarantees based on "on-demand" and "conditional" classes.