What is Trade Finance

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What is Trade Finance
TRADE FINANCE
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Business Objectives of the Players

• Desired quantity and quality of the goods in time
  
• A managed cash flow, with bank finance
• An assuring third party
• Convenient payment channel
• Protection against regulatory errors

• Timely payment
• Bank finance for buyers credit goods
  arrangement
• An assuring third party
• Payment to be received at own location
• Protection against regulatory errors

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Risks Involved in Trade Finance
Payment on Delivery

• Seller runs a risk of non-payment even when he
  has delivered the goods

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Risks Involved in Trade Finance
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Advance payment
Seller

• Buyer runs a risk of non-delivery of goods or
  poor quality of goods even when he has paid the
  money

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Risks Involved for the Players

• Non-delivery / delayed delivery of goods
• Short shipment/inferior goods
• Goods received before the documents
• Foreign exchange fluctuation  
• Regulatory changes

• Non-payment/Delayed payment
• Exchange risk
• Foreign exchange fluctuation
• Regulatory changes

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Role of the Bank

• Banks business interests are
• Providing finance
• Providing fee based services
• Risk mitigation

• The Buyers bank can assist in
• Providing payment assurance to seller on behalf
  of the buyer
• Providing assurance for right quality of goods
• Providing finance in respect of the sale
• Effecting payment to the seller on behalf of the
  buyer
• Handling documents covering the sale

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Role of the Bank

• Banks business interests are
• Providing finance
• Providing fee based services
• Risk mitigation

Sellers Bank

• The sellers bank can assist in
• Assuring payment as a third party
• Providing finance
• to arrange for goods
• to provide credit to buyer
• Handling documents for regulatory requirements
• Obtaining payment for seller

Seller
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Trade Finance Products Assurance

• Banks products
• Letter of Credit
• Bank Guarantee

• For the buyer
• Providing payment assurance to seller on behalf
  of the buyer
• Providing assurance for right quality of goods

• For the seller
• Assuring payment as a third party

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Trade Finance Products Payment
For the buyer Effecting payment to the seller on
behalf of the buyer
For the Seller Obtaining payment for seller

• Banks products
• Bills for Collection
• Remittance

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Trade Finance Products Finance

• For the seller
• Providing finance
• to arrange for goods
• to provide credit to buyer

• Banks products
• Negotiation / Purchase of Bills (Post-shipment)
• Packing Credit(pre-shipment)
• Term Loans

• For the buyer
• Providing finance in respect of the sale

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Flow of Goods
Shipper
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Flow of Documents
Documents can flow in 3 directions a) Seller -
Buyer b) Seller - Buyers bank - Buyer c) Seller
- Sellers Bank - Buyers Bank - Buyer
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Flow of Payments
Shipper
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Inland vs. Foreign

• If the seller and buyer are from the same country
  it becomes an Inland product
• These products are simpler because of the absence
  of exchange/trade control requirements

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Service Tree for Trade Finance
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Risks Involved in Trade Finance

• If the players are in different countries, they
  face Country Risk.

Risks go up as the situation becomes more
complex
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Critical Risk Considerations

• Transport-related risks (damage, loss, theft)
• Credit risk or non-payment risk
• Quality of goods risk
• Exchange rate risk
• Unforeseen events
• Legal risks
• Country risk/Political risk
• Fraud risk
• The risk of misunderstanding

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How Would the Bank Mitigate Risks
Risk Mitigation
Risk

• Transport related risks (damage, loss, theft)
• Credit risk or non-payment risk
• Quality of goods risk
• Exchange rate risk
• Legal risk
• Country risk / Political risk
• Fraud risk
• The risk of misunderstanding

• Ensuring insurance coverage/ carriers liability
• Ensuring credit-worthiness of party Financial
  standing, quality of goods being sold
• Proper document scrutiny
• Forward cover
• Procedures verified by legal experts
• Taking cover
• Substantial credit and compliance scrutiny
• Well-drafted contracts