What are Trade Facilities
Trade facilities refer to the financial services and instruments provided by banks and other financial institutions to support and facilitate both local/International trade with secure payment terms. These facilities help businesses manage the risks and challenges of cross-border transactions, work with new parties, and ensure that goods and payments are handled efficiently and securely.
Types of Trade Facilities Instruments
1) Letter of Credit
A letter of credit is a bank document that guarantees a buyer will pay a seller on time and for the correct amount. If the buyer can’t pay, the bank will cover the cost. This can be offered as financial help, similar to a loan.
In local and international trade, letters of credit are crucial because they help protect buyers and sellers from risks like distance, different laws, and not knowing each other personally.
2) Letter of Credit at Sight
A Letter of Credit at Sight (LC at Sight) is used in trade to ensure payment for goods or services. Sellers arrange an LC at Sight with their bank when they ship goods. This document guarantees that the buyer will pay when they receive the goods.
When the buyer gets the goods, they must pay the bank that issued the LC. This payment confirms the transaction. The process of checking and verifying the documents related to the LC is called sighting. Once done, the LC is considered as a letter of credit at sight.
3) USANCE
A USANCE letter of credit is used in trade to guarantee payment by a set date. The importer’s bank promises the exporter’s bank that payment will be made on time. The importer requests this LC to secure the transaction, and the exporter’s bank approves the terms. Payment happens when the importer provides the necessary documents by the agreed date.
4) Trust Receipt
A trust receipt is a financial arrangement where a bank allows a borrower to obtain goods, stored under the bank’s control, by agreeing that the borrower will sell the goods and repay the loan with the proceeds from the sale. In essence, the bank releases the goods or documents of title to the borrower but retains ownership until the loan is paid off.
5) Working Capital
Working capital is the difference between a company’s current assets and current liabilities. It measures a business’s ability to cover its short-term obligations with its short-term assets. Positive working capital indicates that a company has sufficient funds to support its daily operations and growth, while negative working capital suggests potential liquidity issues.
6) Bank Guarantee
A bank guarantee is a promise from a bank that ensures a contract between two parties—like a buyer and a seller or an applicant and a beneficiary. It acts as a safety net for the beneficiary by making the bank responsible for fulfilling the contract if the buyer fails to meet their obligations or debt.
7) Performance Bond
Performance bonds are issued by banks to guarantee the successful completion of a project or trade deal. These are commonly used by contractors in construction projects to provide reassurance to project owners. If the contractor does not fulfill their contractual obligations, the project owner has the right to claim the bond to cover any losses or damages.
8) Over Draft Facility
Overdraft facility is a financial facility or instrument that enables you to withdraw money from your bank account even if you do not have any account balance. Like any other credit facility, the bank levies an interest rate when you avail the overdraft facility. You typically have to pay a fixed interest rate to avail of an overdraft limit.