Trade finance helps to facilitate international trade by funding the cash flow “gap” that businesses involved in importing or exporting products often deal with. Importers will often find that suppliers demand full payment prior to shipping a consignment of goods, and may also require a deposit paid upfront before manufacturing commences. Exporters, on the other hand, may require upfront funding to cover the period of time between shipment and cash receipt. Specialist trade products can help in both of these situations.
Some of the more commonly used trade products available through the banking system include:
Trade Finance Loan Facility: Trade Finance Loan facilities are short-term loans specifically designed to fund cash flow gaps associated with international trade transactions. A typical trade finance contract will incorporate individual advances (for discrete shipments) under an overall limit set by the bank. Each advance will have a tenor of between 30-180 days, dependent upon the expected timing difference between your supplier payment and receipt of cash from the on-sale of the goods (importer) or between shipment and receipt of payment from your overseas customer (exporter). Trade Finance Loans are available in AUD as well as a range of foreign currencies.
Documentary Letter of Credit: A letter of credit will often be accepted by a supplier in lieu of an upfront cash deposit. The letter is opened by the importer’s bank at the request of their client, and represents an irrevocable promise to pay the supplier’s bank a certain amount of money, subject to receipt of a specific set of documents. Generally these documents will include an invoice for the goods and a bill of lading, and sometimes also an inspection certificate, certificate of origin or insurance documents. Letters of credit are often used in conjunction with a trade finance loan facility, so when the bank pays the supplier it can simply draw up a trade finance loan rather than seek immediate payment from their client.
Documentary Collection: Documentary Collections are usually used by parties who trust each other and do not anticipate any disputes or difficulties in their transactions. They are similar in some ways to letters of credit in that both are conditional payment methods (i.e. involve an exchange of documents for payment), but the key difference between them is that under a letter of credit the importer’s bank is required to pay upon presentation of documents, whereas under a documentary collection the importer’s bank is not legally obligated to do so and will seek instruction from their client prior to remittance. However, if the client does not make payment they will not receive the documents or the associated goods.
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