Trade finance in Singapore is the lubricant oiling the engines of SMEs as long as there is a supplier and a customer relationship. Trade financing in its simplest form is the activity where the exporter gets paid (or is guaranteed a payment) for the goods before shipping it to the importer. However, the importer would also want some sort of assurance that the goods will be received after payment.
After the buyer issues, a trade finance payment instrument such as a Letter of Credit (discussed later) to the exporter, the exporter can only receive funds after furnishing transport documents such as Bills of Lading (B.L.) or Delivery Order (D.O.) to confirm that the goods have been shipped to the importer.
Trade finance Singapore works well for both buyers and sellers, who do not want their business to suffer because of the trade cycle gap. Furthermore, both parties can also use trade finance as an instrument of risk aversion.
Import financing helps buyers procure goods and inventory from overseas sources mainly and little do business owners know that it works pretty well for local sources. Trade finance is a banking facility as well as an instrument to averse the risk involves.
The key benefit of import financing is that the trades between the exporter and importer are assured.
Find out how Trade Financing improve the cash flow of small businesses?
One of the biggest challenges that small businesses face is a cash flow crunch. By using trade financing, such businesses can easily overcome such challenges. Trade financing provides the buyer with a revolving credit line instrument to pay for the goods, giving them time to convert the purchases to monies, and for the seller, it secures the payment of the goods exported.
Types of Trade Finance Products
Letter Of Credit (LC)
A letter of credit is basically a guarantee instrument from the bank of the buyer (importer), ensuring that the buyer will pay for the goods sold to the buyer. It can be revocable or irrevocable where normally, it is irrevocable to protect the buyer’s interest. This banking instrument guarantees that the seller would receive the correct amount when the goods is received by the buyer.
There are many different types of LC which are mentioned extensively here.
Trust Receipt (TR)
It is a notice where a bank allows the buyer to take possession of the merchandise, but the ownership title to the merchandise rests with the bank. Under this arrangement, the bank provides the buyer with a short-term import loan to pay for the goods imported under the Letter of Credit. The credit terms granted by the banks for TR typically range between 60-120 days.
Standby Letter of Credit (SBLC) or Banker’s Guarantee
A standby letter of credit (SBLC) or banker’s guarantee (BG) also common trade finance instruments. Some refer a banker’s guarantee as a performance bond, but they are essentially similar.
An SBLC or BG is commonly used as a form of guarantee or collateral, with the issuing bank guaranteeing payment to the beneficiary of the SBLC/BG based on certain conditions being fulfilled or unfulfilled.
DA/DP allows the exporter to extend some form of credit terms to importer but is considered generally less secure than LC documentary credit. In a DA arrangement, the seller will hand over shipping documents & ownership title of the goods exported only if the buyer accepts the accompanying bills of exchange. In DP arrangement, the seller will give instructions to the bank to release shipping documents & ownership title of the goods only if the buyer makes full payment on the accompanying bills of exchange.
Loan Insurance Scheme (LIS)
SMEs benefits from this scheme as trade financing is usually back by a collateral and in this sense, with this scheme, it is backed by the credit insurance without having the needs to lock away working capital in the form of fixed deposits.
Loan insurance scheme by Enterprise Singapore works hand in hand with participating financial institutions providing a credit insurance against the risks of defaults on the borrowers.
Commercial insurers will underwrite the credit insurance while a portion of the insurance premium payable by the borrower is subsidized up to 50% by the government. This provides some form of relief to financial institution, granting an assurance in the form of credit insurance.
Industries suitable for Trade Financing
All industries which need to purchase physical goods, materials and inventory would be suitable for trade financing. Such industries mainly include wholesalers, manufacturing, construction, and engineering. Most banks would also allow buyers to use trade financing for approved suppliers be it local or overseas suppliers.
Finnex Pte Ltd is the only consultancy that assist business owners to structure the most suitable financing the business requirements acting in your business best interest. We have negotiated more than tens of millions for countless SMEs in Singapore within our network of 47 Financiers.
Contact us today and one of our friendly consultants will reach out to you within 1 to 2 working days.