What is trade finance?

Trade finance refers to the financial activities, techniques, and services that facilitate and support international trade transactions. In addition to funding, trade finance also focuses on managing and mitigating risks that arise in international trade transactions. These risks can include non-payment by the buyer, political instability, currency fluctuations, and logistical challenges.

The specific requirements and solutions may vary depending on the nature of the trade transaction, the countries involved, and the parties’ creditworthiness. Overall, trade finance plays a crucial role in enabling global trade by providing the necessary financial support and mitigating risks for buyers, sellers, and financial institutions.

Trade finance involves providing finance, risk mitigation, and payment solutions to buyers, sellers, and other participants involved in global trade.

The primary objective of trade finance is to minimise the risks associated with cross-border transactions and ensure the smooth flow of goods and services between buyers and sellers in different countries. It provides the necessary funding and financial tools to bridge the gap between the time when goods are shipped and when payment is received, thus reducing the cash flow constraints faced by businesses engaged in international trade.

Supply chain finance is a type of trade finance method that involves unlocking cash trapped in a supply chain to improve the liquidity of a business, its suppliers, or both. It also allows suppliers to access a more favourable rate of credit as funders lend off the back of a corporate’s credit rating or reliability of its pool of receivables – rather than the credit rating of a potentially smaller business. Funders can also offer finance without high risk because the risk is related to the larger business rather than the smaller suppliers.

Supply Chain Finance

Supply chain finance focuses on optimising cash flow and working capital within a supply chain. It involves early payment solutions for suppliers, allowing them to access financing based on the creditworthiness of the buyer.

Letters of Credit

A letter of credit is a financial instrument issued by a bank on behalf of a buyer, guaranteeing payment to the seller once certain conditions are met. It provides assurance to the seller that they will receive payment if they fulfil the terms and conditions specified in the Letter of Credit.

Documentary Collections

Documentary collections involve the exchange of documents through banks to ensure that the buyer’s payment is released to the seller upon meeting the specified conditions. This method provides a level of security and transparency in the payment process.

Trade Loans

Trade loans are short-term financing options provided to facilitate trade transactions. They can be used by importers to finance their purchases or by exporters to meet production or working capital needs before receiving payment for goods or services.

Export Credit Insurance

Export credit insurance protects exporters against the risk of non-payment by foreign buyers. It provides coverage for political risks (e.g., war, expropriation) and commercial risks (e.g., buyer insolvency, protracted default) that may affect payment.

Trade Risk Mitigation

Trade finance also includes risk mitigation services such as trade credit insurance, guarantees, and standby letters of credit, which help protect parties involved in international trade from various risks, such as non-payment, political instability, or disputes.

At Demica we offer supply chain finance as a trade finance solution for large corporates looking to access capital trapped in their supply chain or looking to create a more stable supplier base. We offer solutions for payables and receivables programmes that can be modified to meet your working capital needs.