What is Trade Finance

TRADE FINANCE

TRADE

FINANCE

Business Objectives of the Players

Seller
Buyer

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

payment
against

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

Risks Involved in Trade Finance

Payment on Delivery

Buyer

X
Seller

Seller runs a risk of non-payment even when he has

delivered the goods

Risks Involved in Trade Finance

1
Advance payment

Buyer

Seller

Buyer runs a risk of non-delivery of goods or poor quality of

goods even when he has paid the money

Risks Involved for the Players

Buyer

Seller

Non-delivery
/
delivery of goods
Short
goods

delayed

shipment/inferior

Goods received before the

documents
Foreign
fluctuation

exchange

Regulatory changes

Non-payment/Delayed
payment
Exchange risk
Foreign
fluctuation

exchange

Regulatory changes

Role of the Bank

Banks business interests are:
Providing finance
Providing fee based services
Risk mitigation
Buyers Bank

The Buyers bank can assist in:

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

Providing finance in respect of the sale

Effecting payment to the seller on behalf of
the buyer
Handling documents covering the sale

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
Seller

to provide credit to buyer

Handling documents for regulatory
requirements
Obtaining payment for seller

Trade Finance Products: Assurance

For the seller

Assuring
payment as a
third party

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

Trade Finance Products: Payment

For the Seller

Obtaining payment
for seller

For the buyer

Banks products

Effecting payment

Bills for Collection

to the seller on

Remittance

behalf of the
buyer

Trade Finance Products: Finance

For the seller:

Banks products:

For the buyer:

Providing finance

Negotiation /
Purchase of Bills
(Post-shipment)
Packing Credit(preshipment)*
Term Loans*

Providing

to arrange for
goods
to provide
credit to buyer

finance in
respect of the
sale

Flow of Goods

Sellers Bank

Buyers Bank

Seller
Buyer

Shipper

Flow of Documents

Sellers Bank

Buyers Bank

Seller
Buyer
Shipper
Documents can flow in 3 directions
a) Seller - Buyer
b) Seller - Buyers bank - Buyer
c) Seller - Sellers Bank - Buyers Bank - Buyer

Flow of Payments

Sellers Bank

Buyers Bank

Seller
Buyer

Shipper

Inland vs. Foreign

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

of

the

absence

of

Service Tree for Trade Finance

Bills

Seller

Buyer

Inland

Purchase/
Collection
Negotiation

LC

Foreign

Purchase/
Collection
Negotiation

Inland

Collection

Foreign

LC

Collection

LC

Remittance
Non LC

Non LC

LC

Risks Involved in Trade Finance

WAR!
Seller
Buyer

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

Risks go up as the situation becomes more

complex

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

How Would the Bank Mitigate Risks

Risk

Risk Mitigation

Transport related risks

(damage, loss, theft)

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

Credit risk or nonpayment risk

Quality of goods risk
Exchange rate risk
Legal risk
Country risk / Political risk
Fraud risk
The risk of
misunderstanding