Trade financing: All you need to know

Trade finance is a vital subset of the overall finance function dealing predominantly with trade operations. Trade finance is more relevant when it comes to international operations. Here, businesses need services in two countries where different trade norms could apply involving the sale of goods and services as also exchange of currencies in relation to payments.

Trade finance assumes significance because it helps both parties in a cross-border transaction to transact easily. The seller gets paid for the sale of goods or services and the buyer gets the goods or services delivered as per the terms and conditions of the sale. Trade finance helps to make the transaction smoother for both parties, while reducing delays in completing the transaction. Thus, reducing trade risks for both parties.

Contours of trade finance services
 

Typically, trade finance services deal with commercial and international trade and monetary activities such as:

• Lending
• Letters of credit
• Factoring
• Guarantees
• Insurance
• Bank-to-bank transactions known as correspondent banking
• Adopting latest technologies e.g. blockchain

Providing finance for trade is an integral part of any trade finance activity. The financier helps the process of trade by filling the trade cycle funding gap. The function of trade finance is to act as a third-party to remove the payment risk and the supply risk, whilst providing the exporter with accelerated receivables and the importer with extended credit.

The financier seeks certain facilities from the buyer and seller that include

• Security and control of the goods traded
• Use of funds lent
• Repayment of lent funds
• Close supervision of the trade cycle

Thus, trade finance helps sellers and buyers to mitigate their respective risks through extending credit to the importer and making faster payment to the exporter.

IDFC FIRST Bank Trade Finance Features

IDFC FIRST Bank is among the leading trade financiers in India with an excellent track record for financing all kinds of trade – large and small.

The various services under trade finance include

Cash management services
 

IDFC FIRST Bank’s Cash management services provide focus, efficiency and convenience with a host of features such as:

• Payables and receivables management, reconciliation, IDFC FIRST Bank Edge Debit card
• The concentration of cash at a central place for easy monitoring and effective deployment of cash resources
• Earning income from parked cash through sweep-in fixed deposits
• Effortless monitoring and operation of multiple accounts

Trade finance and services
 

Businesses involved in export and import can benefit from IDFC FIRST Bank’s trade finance services that offer a comprehensive suite of solutions that include

• Bill negotiation – facility of better terms at competitive rates
• Letter of Credit Advising – authenticity check and LC advice
• LC confirmation – enables financing options through quick confirmation at optimal cost
• Bill collection – enables faster receivable turnaround in any currency
• Discounting/purchase of bill – financing through the purchase of bills without LC opening
• Pre-shipment finance – flexibility of order-based running account
• Bank Guarantee (BG)/Standby Letter of Credit (SBLC) for domestic and international transactions - Performance Guarantees, Financial Guarantees, Bid Bond Guarantees, Advance Payment Guarantees, Deferred Payment Guarantees and Shipping Guarantees/DO
• Remittances – inward remittance alerts and disposal through instructions

Escrows
 

Escrows are a means of mitigating risks and complexities of commercial transactions. IDFC FIRST Bank’s escrow services provide several options, comprising of

• Escrows – revenue-sharing, milestone, franchisor-franchisee, anchor-dealer and e-tendering escrows
• Merger and acquisition transactions - Share-purchase transaction-linked, FDI-linked share-purchase, Open offer and indemnity obligations escrows
• Lending and investment transactions - Project finance transactions, Lending-linked debt servicing, DSRA, default, External commercial
• Capital market transactions - Buyback offer and Delisting offer escrows
• E-commerce and payment facilitation - Escrow account for prepaid instrument issuer and Nodal accounts for payment and marketplace aggregator

Integrated channels
 

IDFC FIRST Bank offers unified portal services that can connect anytime from anywhere through

• IDFC FIRST Bank BXP - Business eXperience Platform – omnichannel experience, full audit control, advanced security features, front-end consolidation and back-end integration
• Customized dashboard – optimized information extracts and dedicated transaction workflows, alerts and reports

Forex, derivatives and fixed income
 

Customized hedging solutions for currency risks is a facility from IDFC FIRST Bank that helps buyers and sellers through

• Foreign exchange – forward contracts and foreign exchange options to mitigate risks
• Interest rate derivates – interest rate swaps and forward rate agreement
• Fixed income – treasury bills, government and corporate bonds, short-tenor commercial paper and long-term financial structures
• Exchange traded currency derivatives - Currency Futures-USD/INR, EUR/INR, GBP/INR and JPY/INR. Currency Options - USD/INR

Project finance
 

IDFC FIRST Bank offers a number of financial instruments through which it lends to businesses to provide trade finance. Some of them include:

• Financial instruments - corporate loans, project loans, subordinated debt, loans against shares, mezzanine finance and equity
• Customer engagement
• Domain knowledge

Treasury and capital markets
 

IDFC FIRST Bank offers customer-centric treasury and capital markets services, including:

• Risk mitigation - protection from currency and interest fluctuations
• Raising funds - short tenor commercial papers to long-term financing structures

Trade financing is often short-term, lasting for the period that the trade gets consummated. It allows both parties to focus on their core competencies, leaving the trade financing task to intermediaries such as IDFC FIRST Bank. It also protects them against inherent risks of conducting international trade – political instability, currency fluctuations, non-payment issues, or the lack of creditworthiness.

IDFC FIRST Bank is at the forefront of using technology to offer services to its clients. It is constantly looking at digitization of trade finance through robo-advisors, smart contracts, blockchain, remittance apps, cryptocurrency, RegTech and InsurTech. These would help improve transparency, mitigate risks, lower fees, eliminate paperwork and lower transaction costs. Accessing trade finance from IDFC FIRST Bank is easy and quick through its user-friendly online platforms backed by a robust back-office.

Disclaimer

The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.