• TRADE FINANCE SERVICES

    TRADE FINANCE

    Definition

    Trade finance may be defined as the financing of international trade.

    Trade finance includes activities, such as, lending, issuing letters of credit, factoring, export credit and insurance, etc.

    Persons / entities involved with trade finance include importers and exporters, banks and financiers, insurers and export credit agencies, as well as other service providers.

    Trade finance is of vital importance to the global economy, with the World Trade Organization estimating that 80 to 90% of global trade is reliant on this method of financing.

     

    We shall study about this article further, in detail, in our next post.

     

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  • factoring

    Factoring

    Factoring is the selling of the business’s receivables to a factoring company. The factoring company or the Factor pays the business a specific percentage of the value of the accounts receivable and deducts a small fee being the cost incurred for collection of payment on maturity.

    As the Factor collects the receivables instead of the business, one way to look at factoring is that a business is outsourcing its receivables collections process. Based on specific country regulations, factoring could be with OR without recourse.

    If the factoring is done without recourse, it would become an ‘off-balance sheet finance’.

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    Did you know that – “In Factoring, generally a maximum of 80% of the value of receivables is paid to the business and is normally availed for shorter durations ranging from 30 days to 180 days”!!!

  • trade-finance1

    TRADE FINANCE

    The term ‘Trade Finance’ is basically related to ‘domestic’ as well as ‘international’ Trade transactions. Trade Finance refers to finance for Trade.

    For a trade transaction, there should be a seller to sell the goods or services and a buyer who will buy the goods or use the services. Various intermediaries such as banks / financial institutions can facilitate this trade transaction by financing the trade.

    Though international trade has been in existence for centuries, trade finance was subsequently developed as a means of facilitating it further. The widespread use of trade finance is one of the factors that have contributed to the enormous growth of international trade in recent decades.

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  • What is Factoring

    Factoring is an arrangement between the bank / financial institution (who is called the Factor) and a company, wherein the Factor buys the book debts of a company and pays cash to the company against their receivables. The Factor then collects the amounts from the debtors of the company. 

     

    There is a factoring arrangement, wherein the client makes a sale, delivers the product or service and raises an invoice. The factor buys the right to collect on that invoice by agreeing to pay the client the invoice’s face value at a discount. The factor normally pays about 75 percent to 80 percent of the face value immediately and pays the balance when they receive the amount from the Debtor.

     

    Because a Factor extends credit not to their own clients but to their clients’ Debtors, they are more concerned about the Debtors’ ability to pay on due date, rather than the client’s financial status. There are 2 types of Factoring – “With Recourse Factoring” & “Without Recourse Factoring”. Factoring, particularly “without recourse” is not a loan and hence it does not create any liability on the company’s balance sheet. It is the sale of an asset by the company whereby they convert it into Cash.

     

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