What is the trade finance process?
When a supplier requires the customer to prepay for goods before the supply, the customer may need to reduce the risk by requesting the supplier to document the goods. These documentations include trade credit insurance, factoring, documentary collection among others and are what makes up the trade finance process.
Other methods include a letter of credit and advanced payment guarantees APGs, Invoice financing, where there are invoice factoring and invoice discounting. This offer financing to small and medium-sized business SMEs during the business process. At Momentum Credit we offer solutions to all business needs. This is both invoice factoring and discounting. To find out more about invoice finance click here.
Letter of credit
A letter of credit is a promise given by a Financial Institute or a Bank in place of the Buyer to the Seller, that if he, the Seller presents the complying documents to the Buyer’s designated Bank or the Financial Institute as specified by the Buyer in the Purchase Agreement then the Buyer’s Bank Institute will make payment to the Seller. This is issued mostly during international trade as the importer and the exporter may require reducing their risks when handling business from different countries.
Advance payment guarantees APGs
An advance payment guarantee APG is a surety given to a buyer by the seller or the supplier, once the suppliers win the tender. This document from a bank or a financial institution is an assurance given to ensure the supply for the goods ordered in the tender as per the agreement and if not the buyer be refunded the upfront cost used in the process. Advance payment guarantees are necessary for the tenders that require the customer to pay some cost before the goods are supplied either partly or in full. You can also click here to find out more about APGs.
The Benefits of Trade Finance
The trade finance process facilitates the growth of Small and medium-sized business SMEs. The trade finance process increases the working capital and offers better cash flow management which allows business owners to improve the control of the day-to-day running costs of the business while being able to fulfill large orders that may not have been possible in the past. This provides a solution to the need for small business as banks and other financial institutions do not offer flexible and easy solutions.
Using the trade finance process a small or medium-sized business SME gets the opportunity to supply orders that they cannot finance on their own. This enables them to get more business opportunities and deals that can profit them in the long run. This also increases the cash flow available to a business and increases trust on potential customers expanding the possibilities of the business. Increasing trust also means that the business can get first deals from customers who they have not conducted business within the business in the past as it provides the business with social proof.
Greater productivity and efficiency
When a business Works with other players it allows the business and the business owners to diversify their supplier network. This increases the efficiency of the business and the business processes as a whole. Increase in supplier network also promotes productivity as the business gets more opportunities and business transactions. This in the long run also increases the net worth of the business. Trade finance also issues businesses with the ability to bid for big tenders promoting fair competition to other small and medium-sized business SMEs. This is positive in the long run as small businesses get the chance to competitively outdo big corporations.
Reduces bankruptcy risks
Small and medium-sized business SMEs get to the verge of collapse when they have intense pre-measure from creditors and meet inconveniences from bad debts and debtors. Small business also requires cash flow to finance growth as well as day to day business needs. Bad debtors, and debtors who fail to pay also put small businesses at risk. This is because deployments in payments lead the businesses to face constraints in working capital needs. Other customers who do not honor them payments at all require legal procedures which may be expensive and time-consuming.
Small and medium-sized businesses require financing solutions and Momentum Credit offers solutions to such needs. With products such as Asset financing, Momentum Credit focuses on nothing but expanding your possibilities.