Trade Finance

In Letter of Credit discounting process, the bank purchases the documents or bills of the exporter and in return make him the payment for a security or a fee. A Letter of Credit is a letter from Bank guaranteeing that a buyers payment to a seller will be received on time and for the correct amount. It is consider that the if consignee wants to pay after shipment reaches him. But in case amount is required immediately after the documents are accepted. The banks will offer topay you on a discount basis, meaning that they deduct a percentage from the value, which they keep as the cost of discounting and bank pay the amount immediately the value less that the discount. It speeds up the cash flow movement in the organization as the beneficiary receives an advance payment which helps in the smooth movement of working capital in the organization.

Factoring is a financial transaction and a type of debtor finance in which a business sells its accounts receivable (bills of exchange or promissory notes, or simply issued invoices, which the exporter is selling on an open account basis) to a third party at a discount. A business will sometimes factor its receivable assets to meet its present and immediate cash needs. A financing method in which a business owner sells accounts receivable at a discount to a third-party funding source to raise capital. Factors are normally specialized financial services companies, but many are owned by banks. Normally, afterthe factor has purchased a receivable, the importer or buyer pays the factor directly.

Accounts receivable financing allows companies to receive early payment on their outstanding invoices. A company using accounts receivable financing commits some, or all, of its outstanding invoices to a funder for early payment, in return for a fee. Accounts receivables finance unlocks the cash that is owed to the small company by selling the invoice. So, technically it is not lending, but an asset purchase. Which means that you are raising cash against your debtors.

Vendor financing is the lending of money by a vendor to a customer who then uses it to buy the vendor’s inventory or services. Sometimes called “trade credit,” such financing usually takes the form of deferred loans from the vendor. It may also include a transfer of shares of the borrowing company to the vendor. Vendor financing is most common when a vendor sees a higher value in a customer’s business and business relationship than a traditional lending institution does. Such loans carry a higher interest rate than what a borrower would normally find at a bank.