Question

What is the process that goes on involving the buyer/importer in trade finance.

Answer 1

Trade finance signifies financing for trade, and it concerns both domestic and international trade transactions. A trade transaction requires a seller of goods and services as well as a buyer. Various intermediaries such as banks and financial institutions can facilitate these transactions by financing the trade.

While a seller (or exporter) can require the purchaser (an importer) to prepay for goods shipped, the purchaser (importer) may wish to reduce risk by requiring the seller to document the goods that have been shipped. Banks may assist by providing various forms of support. For example, the importer's bank may provide a letter of credit to the exporter (or the exporter's bank) providing for payment upon presentation of certain documents, such as a bill of lading. The exporter's bank may make a loan (by advancing funds) to the exporter on the basis of the export contract.

Collection and discounting of bills: It is a major trade service offered by the Banks. The Seller's Bank collects the payment proceeds on behalf of the Seller, from the Buyer or Buyer's Bank, for the goods sold by the Seller to the Buyer as per the agreement made between the Seller and the Buyer.

Trade finance is used when financing is required by buyers and sellers to assist them with the trade cycle funding gap. Buyers and sellers also can also choose to use trade finance as a form of risk mitigation.

The Trade Finance Process:

1. The potential borrowing company will send their management accounts and audited financials; as a best case this would be the previous 5 years

2. In the event that the initial documents and financials outlined above are satisfactory, then a financier will outline that they can move forward on this basis. At this stage more KYC documents will be filled in along with credit application forms

3. A call or meeting may then be set up with the prospect to discuss trade flows

4. The transaction will then be taken to the operations or credit team to be discussed

5. On the basis that the borrower is happy to move forward, then the more extensive due diligence process is carried out once documents have been received from the prospect

6. Following due diligence, the business case may need to be circulated around the specific transaction team that deals with the type of facility being requested

7. After internal approval, the borrower is sent a draft of the term sheet

8. Following agreement of the outline facility by the borrower and a term sheet being accepted; a deal is presented to the Credit Committee

9. Questions may be asked by the Credit Committee in order to understand the processes in a company. When approved, legal agreements, such as security agreements and a facility are drawn up

10. All of the personnel who will have a part in the running of the facility will have an operational meeting so that each party will understand the moving parts involved and what their responsibility entails. The management of the client and smooth running of the account is key

11. When all of the above is completed and the agreements are signed, funds are then released

12. Following drawdown of facilities, the company will have administrators who will monitor the facility and manage it; so that they can make sure all funds flow freely. They also make sure that all facilities are reviewed, outstanding balances are cleared, there is management of counterparty risk, facility reconciliation is carried out and there is management of when repayments may happen.

13. On borrowing base or more structured type facilities; there may be the need or execution of further security documents, such as pledges and collateral management arrangements.

Buyers’ Credit is a loan taken by an importer (Buyer) from overseas lenders such as banks and other financial institutions to finance the purchase of capital goods or services.