Trade Finance

The financial support provided through various financial products for trading transactions locally and internationally is defined as trade finance. Simply said, it is the funding and support given to conduct trading  activity. This is mainly sanctioned by banks or other financial institutions.

Types of Trade Finance:

• • • Working Capital Facility/Loan
    • Term Loans
    • Letter of Credit
    • Receivable Discounting (Invoice Factoring/ Invoice Discounting/ Cheque Discounting)
    • Bonds or Guarantees

Working Capital

It is the difference between Current Assets (Cash + Inventory + Accounts Receivable) – Current Liabilities               (Accounts Payable + Short Term Borrowing + Accrued Liabilities).

It is fundamental for the study of operational cycle from procurement of raw material/inventory till payment to the suppliers, i.e., from the point at which the company acquires raw material till the received payment is on  sale of goods, and suppliers get the payment. The number of days taken in this conversion cycle is crucial for  analyzing the working capital. On the basis of this analysis, the finance team is capable of identifying the  working capital gap and can plan to source the fund in order to fill the gap.

Term Loans

It is the advance offered by the bank which has to be repaid through a specific number of installments. Since the term loans charge a rate of interest that is either fixed or fluctuating, it should be paid along with the fixed installment. Based on tenure, term loans are categorized as Short Term Loan, Intermediate-Term Loan, and Long Term Loan. For reducing the risk of default of payment, collateral can be required for a term loan.

Letter of Credit

Documentary Credit, or generally termed as Letter of Credit (LC), is a permanent undertaking issued by a bank. Here the bank undertakes to make payment to a beneficiary with the submission of documents as per the LC and all terms and conditions being complied with. A bank is used as an intermediary in an International trade  by the exporter and importer to guarantee the payments and delivery of goods due to factors like distance and  uncertainty on the trustworthiness of a party. If the buyer is not able to make the payment , the bank should   cover the full amount.

Benefits of Letter of Credit

   For the buyer

• • • Non – Fund based facility
    • Interest-free financing option

   For the seller

• • • Credit risk is minimized
    • Pre-shipment finance against the LC is provided.
    • Timely receipt of money

Receivable Discounting

Invoice Discounting: This allows a business to receive a part of the raised invoice amount immediately on presenting the invoice. Upon receiving payment from the customer the balance is received. This also increases the cash flow of the business with the obtaining of funds.  Invoice Discounting help in obtaining funds immediately, which will  increase the cash flow of the business.  In a normal scenario this facility is customer-specific and as per the bank policy with the customer. Before discounting an invoice, the bank will check the payment capacity of the customers, trustworthiness and further security.  

Cheque discounting: When the bank finances the transaction and provides funds before the due date of a PDC  issued by a   customer, the process is termed as cheque discounting. Here the supplier receives the payment immediately, and this allows the customer to enjoy a credit period to make payment.

Bonds or Guarantees- Through bonds and guarantees, security is provided by the bank to the buyer in cases where the seller fails to settle the obligation. If the seller fails to deliver the ordered goods, bank provides compensation to the buyer.  These are generally utilized in the construction industry or for particular projects. Depending on ‘on-demand’ and conditional classes , bonds are classified as Tender Bond, Performance Bond, Advance Payment Bond,  Retention Bond, and Payment guarantee.

Financial Feasibility

In order to make a final decision regarding the conversion of the business proposal into reality, a feasibility study is  required. Are you confused about the practicality and achievability when it comes to starting a new business or  expanding the business line?

What is meant by ‘Feasibility Study’?

Field Research

• • • Personal interview
    • Interview through phone

Surveys

Desk Research Internal Sources  

• • • Sales figure
    • Accounting sources
    • Customer’s complaints and comments
    • Sales representative report

Online Research

• • • Search engines
    • Newspapers
    • Other online databases
    • Sales representative report

Printed Reports

• • • Business statistics
    • Industrial market research reports
    • Business directories

Other Market Analysis

• • • Market Trend
    • Market Segment
    • Targeted Customers
    • Target Market Analysis
    • Pricing Strategy
    • Competitive Condition

Financial Aspect

In this step, the cost for start-ups, operating cost, financing the calculation of legal costs, capital acquiring costs and fixed & variable costs are calculated and profitability is analyzed.  The legal costs, capital acquiring costs and fixed and variable costs are calculated at this stage. Fundraising methods through loans, investors, or other methods are determined, and implications and costs related to financing options are studied. The projected income and expected return are also verified. For ensuring a healthy cash flow, the supplier and customer terms of payment are also determined. General contents of all financial feasibilities include the following:

• • • Income Statement
    • Cash Flow Statement
    • Financial Summary,
    • Ratio Analysis VI BEP
    • Projected Statement of Financial Position
    • Notes & Explanations of the Financial Projections.

Technical Aspect

In this step, the necessary resources for business are analyzed. Requirements of hardware / software, availability of capital assets and if an expansion or change in line can be held with the capital being invested are some of the important aspects to be determined regarding facilities and equipment. When it comes to labor and management, aspects like manpower requirements, their technical knowledge, the training they should be provided, competency & experience of manager etc should be studied.

• • • The cost of the technology
    • Costs for technological development
    • Costs for the consultancy support (design and implementation)
    • Costs for the organization for training
    • Running cost.

Schedule

At this stage the time frame to set up the business is decided. Since the market is compelling, a viable business plan must be executed within a set time frame. For ensuring that the goals and objectives of the company is met, the business plan should be executed in fixed time. 

Operation Feasibility

PIECES framework is made use of, which helps to identify the problems to be solved and the urgency they hold.

• • • Performance– Whether the mode of operation give enough output and response time? 
    • Information– Whether the managers and end-users are provided with timely, relevant, authentic and correctly formatted information? 
    • Economy – Whether the mode of operation can lend cost-effective information services to the business? Could there be cases of reduction in costs and/ increase in benefits?
    • Control – Whether effective controls to secure protection against fraud and guarantee of accuracy and security of data and information is provided by the mode of operation?
    • Efficiency– Does the mode of operations make maximum use of available resources including people, time, and the flow of forms?
    • Services – Does the mode of operation provide reliable services? If so is it flexible and expandable?

The benefits of conducting a Financial Feasibility Study

• • • It helps in narrowing down various business plans.
    • It leads the business in the right direction.
    • Businesses can identify available opportunities using a detailed study of the market.
    • It can mark the weaknesses of their competitors.