Trade Finance

Trade finance or trade loan is a borrowing facility offered by various lending institutions to firms involved in trading goods and services with parties within the country or outside the country. These loans usually work as a fully revolving credit facility which bridges the monetary gap between the period it has to pay for the purchased goods and the period when it receives funds from the sale of those goods.

There are different types of trade loans. Trade finance is provided at several levels since trade finance involves different types of products and services. Trade finance is available under various categories.

Here again, the guarantor bank is providing the loan to the buyer, who is a client of the bank. There are different bank guarantees available such as financial guarantee, performance guarantee, tender bonds, etc. In each case, the seller gets a guarantee from the buyer’s bank that in case of default by the purchaser, the bank will make the applicable payment on the receivables. In most cases of trade transactions, sellers usually insist on a bank guarantee from the buyer before they proceed with the transaction.

In such types of trade financing, the bank takes over the payables and the receivables of the customer providing instant finance to the latter and then later collects it from the counterparty with whom the customer is transacting. There is a certain cost associated with such services, and this is built into the amount at which the bank takes over the bills. This cost will be borne by the customer and depends to a large extent on the customer’s relationship with the bank, track record in making payments and the kind of clients that the customer has.

The trade finance eligibility criteria vary from one lender to another. However, a few common criteria are:

In certain cases, these criteria can be relaxed, provided the loan applicant has a strong credit and business profile.

Also Know: What are the eligibility criteria for Working Capital Loans?

Also Know What is the process to get a collateral-free loan in India?

Apart from the proof of identity, proof of residence and other KYC documents, there are some specific documents to be provided for availing trade finance.

The bank will also ask for the proof of an agreement between the buyer and seller to check the legitimacy of the transaction and ensure that goods are indeed being transferred from the seller to the buyer.