Brief Idea about Finance

Systematic Deposit Plan From Bajaj Finance

Trade finance means financing with trade concerning both domestic and international transactions. It involves both a producer and a consumer. Banks and financial institutions facilitate these trade transactions by financing the trade. It acts as a medium to represent the financial products used by different countries to facilitate international trade and commerce. It covers multiple financial instruments that all the banks and companies utilize to make their trade transactions. It revolves around selling products that allow the clients to import and export goods, bank as a guarantor in between them.

Types of Trade Finance in India :

1. Insurance ( It protects from financial losses)

2. Letter of Credit ( It is issued as a guarantor of payment by a specific point in time to one’s facing problem with receiving their payments.)

3. Export Credit (It exports insurance solutions and guarantees for financing)

4. Term loans (It offers businesses capital expenditure along with the expansion of any business.)

5. Invoice factoring ( It improves cash flow and revenue stability)

6. Working capital limits ( Examples: Overdraft, Cash Credit, etc.)

Importance :

1. Helps reduce the global trade risk by accommodating the divergent needs of both an exporter and an importer.

2. It has become a common and crucial medium for companies to improve efficiency and boost their revenue.

3. It improves cash flow and the efficiency of operations carried out by the banks or companies.

4. It is beneficial if one wants to expand their business and generate revenue through trade.

5. Allows countries to expand their market and access the goods and services that otherwise might not be domestically available.

Advantages:

  • Trade advances help increase sales: A customer tends to buy more significant quantities of a commodity at credit over when he is asked to pay in cash instantly.
  • Consumer Satisfaction: An objective of a business is its consumer Satisfaction. Pursuing goods in credit makes the consumer happy, thereby increasing its Consumer Satisfaction.
  • Increase in Goodwill: When a Business increases its services, its Goodwill rises in the market.
  • Healthy Competition: When a business provides goods in credit, all the consumers in the market will try to retrieve goods from them. The other companies, to maintain their sales, also has to provide additional services.

Disadvantages:

  • Bad debts: Some business has a minimal percentage of profit margin. If they give credit to their customers, and they do not pay them back, this trend could lead them to suffer heavy losses.
  • Lack of funds: In the case of several businesses, they have to buy the goods they sell in advance, but after the sales of goods, the customers might take three months to pay back the actual sum. This creates a vacuum or crisis of funds.
  • Maintaining a book of record: When the volume of customers and the credit in the market increases, the business must keep an adequate record of the money in rotation.

To conclude: Trade financing is highly beneficial if one knows the correct way to handle it, especially for one’s concerned with international trade. It works best for businesses with a successful trading record and allows a positive cash flow. It also, in an indirect way, helps reduce poverty and unemployment. It also removes payment risks and supply risk, hence is beneficial for both the consumer and the producer.

About The Author: sanath pollemore