Domestic trade finance options
The trade finance definition covers many options for businesses purchasing products and services domestically.
Bank term loan
A bank term loan has been a common way to boost working capital. Typically, these loans are secured by commercial or residential property. One of the main shortcomings of bank term loans is the amount of paperwork required and the time to find out if the finance has been approved. Often, trade finance is required as a quick solution, so this is not an option if you need finance fast.
Line of credit
This is a credit facility that lets you borrow up to a predetermined limit. For example, if you are approved for a $50,000 line of credit, you can withdraw any amount up to this amount and you are only charged for what you are using. For example, if you have drawn $25,000 out of the $50,000, you will only pay interest on this amount. You also have flexibility in repaying what you owe, as there are not set repayment terms. The flexibility of a line of credit makes it suitable as a trade finance facility that can help in the short term and long term. Find out more in What Is a Business Line of Credit?
Supply chain finance
Supply chain finance describes a set of technological solutions aimed at lowering financing costs and improving business efficiency for buyers and sellers linked in a sales transaction. SCF methodologies work by automating transactions and tracking invoice approval and settlement processes, from initiation to completion. Under this model, buyers agree to approve their suppliers’ invoices for financing by a bank or other outside funder, often called a ‘factor’ or ‘investor’. Find out more in How Does Supply Chain Finance Work?
Unsecured business loans
This form of business lending can be a quick trade finance solution. With unsecured business loans, no collateral is required so the process is much quicker than with a typical bank term loan that can take weeks to get approved. With Moula, for example, the application can be completed in less than ten minutes. For making a lending decision, the accounting data of a business is analysed quickly and safely online. Learn more about business loans from Moula.
International trade finance
With global trade, there are many more risks and complications which affect the way this finance works. If you are selling a product overseas and invoicing the customer, you don’t have recourse to follow up and get paid. Chasing debt locally is challenging enough, and this problem is compounded if you are selling overseas. Besides the payment risk, there’s foreign exchange risk. This occurs if the exchange rate changes before the transaction has been finalised.
For these reasons, there are specific trade finance solutions for businesses involved in international trade that reduce risk. This most common one is a letter of credit. This is a payment method used for the sale of goods between exporters and importers. A letter of credit is a letter from one bank to another that acts as a guarantee for a payment to be made to a specific company or person when specific conditions are met. The exporter must fulfil the terms and conditions outlined in the letter of credit to ensure the issuing bank will pay.
This process also involves a document called a bill of lading, which establishes evidence and the terms of a contract between a shipper, a transportation company, and the agents providing and receiving the cargo. It acts as a document of title, a contract of carriage, and a receipt for goods being exported. Given the complexity and international scope required, most letters of credit are issued by major banks.
