What is Trade Finance? Why is Trade Finance Important?

TRADE FINANCE IS IMPORTANT! www.bandeniachallengerbank.com

BANDENIA CHALLENGER BANK WE PROVIDE TRADE FINANCE SOLUTION

TRADE FINANCE IS IMPORTANT! Trade finance gets cash to exporters at shipment.

They get paid before delivery, against their shipping documents.

Most exporters take pre-shipment finance from their local banks. This is to finance the making of the goods which are shipped to international buyers.

An exporter who gets paid before releasing the goods to the buyer has greater access to pre-shipment finance at a lower cost – directly increasing the efficiency of the supply chain and reducing prices for buyers.

An exporter who gets paid after delivery has to juggle a collateral gap. The goods are handed over and then he waits for the money. His local bank is usually not comfortable in this situation as preshipment finance is outstanding; the buyer now has the goods, but he may or may not pay. This results in higher costs and can even mean that the exporter’s credit lines get blocked.

WHAT IS TRADE FINANCE? Trade finance is the process by which: The exporter ships goods and gets paid The buyer pays later Note that trade finance pays the exporter before he releases control over the goods.

This is before delivery to the buyer.

WHAT ARE BASIC PRINCIPLES OF TRADE FINANCE? Trade finance has worked on this basis for centuries: The exporter provides evidence of the goods and their shipment.

This is done by presenting a pack of documents (bill of lading, packing lists, inspection reports, certificates etc).

Payment is made on the basis of the documents and before the goods arrive at the buyer.

WHAT ARE BASIC PRINCIPLES OF TRADE FINANCE? In fact, the buyer cannot land the goods without the documents.

If the payment does not come, the exporter still controls the goods.

This is why it is also called a “documentary credit“.

WHY IS TRADE FINANCE IMPORTANT? Trade finance is not just about financing the goods in transit – for the period when they are being shipped. Whilst this can easily be 30 days, most exporters have the resources to fund this period with the support of their local banks.

No – the main issue is that most exporters borrow money from their banks to make the goods. This is often called “pre-shipment finance” and it takes a number of forms: packing credits, back-to-back loans or LCs, loans for materials, supplier credits and so on.

WHY IS TRADE FINANCE IMPORTANT? And so they need to get paid for the goods before handing them over to the buyer in order to access pre-shipment finance and to control the financing cost involved.

Local banks that provide these crucial preshipment facilities to factories, especially in South and East Asia, want to see a “joined-up” process.

WHY IS TRADE FINANCE IMPORTANT? They lend money to the factory to make the goods.

Repayment of these loans comes from the sale of the goods.

They do not want to see the goods being handed over to the buyer without the cash arriving.

If this happens, there is a collateral gap that is hard to cover in the local market.

WHY IS TRADE FINANCE IMPORTANT? This collateral gap is hard to cover because a local bank in the exporter country can struggle to understand the credit standing of an international buyer who is far away. It is hard to get comfortable on the buyer credit, or to take action if no payments arrive.

So getting paid at shipment is essential for exporters.

It reduces the cost of their pre-shipment finance and increases its availability.

About us Creating Value with it's fast and efficient Solutions

At Bandenia Challenger Bank, we are committed to delivering trade and financing solutions in the best interest of our customers.

Carrying out smooth and efficient transactions with diligence and efficacy has been our driving force since day one. With a structured support system, we have been able to successfully help our clients in growing their cash flow and capital.

We strongly adhere to our mission of providing custom financial solutions to complete their transactions effectively.

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