20 years: Trade finance & banking
Trade Finance represents products that facilitate international trade. In this introductory video into the topic Andy breaks the sector down into its constituent parts.
Trade Finance represents products that facilitate international trade. In this introductory video into the topic Andy breaks the sector down into its constituent parts.
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9 mins 57 secs
Conventional lending will not provide funding for all circumstances. If a company does not have assets to pledge for a secured loan or have the requisite balance sheet for a bank loan, trade finance provides a feasible solution. “Trade Finance” can be used to describe several different financial products designed to address different stages of a transaction.
Key learning objectives:
Define trade finance
Identify the circumstances where trade finance is sought as a funding solution
Understand the different parts of trade finance
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Trade finance is an all-encompassing term used to describe funding provided to companies to help them carry out their day-to-day business. As implied in the name, “Trade Finance” differs from conventional bank lending in that it is specifically focused upon financing transactions.
Typically, a corporate can choose from a wide range of financing types. A normal, secured term loan involves the company allowing the funder to take a legal charge over a particular asset, with property being the most common example. An unsecured loan requires no security but generally investors are nervous about making large advances without taking security.
However, for a company that has a turnover that is disproportionately large compared with their asset base, these two solutions don’t work. If a company is trying to complete a transaction and has the following characteristics:
A conventional lender may decline to finance these transactions. However, the fact that they are “self-liquidating” and “asset-backed” means that they are a perfect example of transactions that trade finance teams would look at.
The trade finance company looks at the transaction very differently to a bank. Whilst they are likely to present the funding as a single package, it is actually composed of several different parts:
The risks are actually very different in all of these components. A trade finance house has to be sensitive to all of the elements of the transaction in order to protect its own position and provide the right solution to the client.
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