- June 28, 2021
- Posted by: admin
- Categories: Blog, Finance & accounting
Trade finance has grown common in Dubai, UAE, and most local and international banks provide services to SMEs, permitting them to trade with local and international markets. If you want to know more about trade finance in Dubai, then here we present you with a few things that will help you to understand trade finance.
What is Trade Finance in Dubai
Trade finance is the financial assistance provided for business transactions both internationally and locally through different financial products. In simple words, trade finance is the funds and assistance offered to operate trading activity. Trade finance is majorly sanctioned by banks or other financial institutions. Trade finance is a tool used to unlock capital from a company’s current stock or receivables or add further finance facilities depend on the company’s trade cycles.
Types of Trade Finance in Dubai
There are many types of trade finance include:
- Working Capital : Working capital is basically an indicator of the short-term financial position of an organization and is also a measure of its overall efficiency. Working capital is obtained by subtracting the current liabilities from the current assets. It is necessary to study the operating cycle from the purchase of raw material/inventory to the payment to the suppliers, means, from the point from which the company purchases raw materials till the payment is received on sale of goods and the suppliers’ payment is made. The number of days taken in this conversion cycle is very relevant to the analysis of working capital. Depend on this analysis, the finance team can identify the working capital gap and plan the source of funds to fill the gap.
- Term Loans : A term loan is an advance received from a bank that has to be repaid in a fixed number of installments. Term loans charge an interest rate, either fixed or fluctuating, which has to be repaid with specific installments. Business usually takes advantage of term loans for the purchase of fixed assets. Term loans can be classified depending on the period of the loan as a short-term loan, intermediate-Term loan, and long-term loan. A term loan may also need collateral to reduce the risk of default of payment.
- Letter of Credit : Documentary credit, or commonly called letter of credit, is an irrevocable undertaking issued by a bank whereby the bank undertakes to pay the beneficiary, documents are presents according to the Letter of credit provided, and all terms and conditions have adhered to. In international trade, the importers and exporters utilize an intermediary like a bank to guarantee the payments and delivery of goods, due to factors such as distance, uncertainty on the genuineness of a party, etc. If the buyer is not able to make the payment, the bank would be needed to cover the proper amount.
- Invoice Discounting : Invoice discounting permits a business to receive a portion of the invoice amount immediately upon presentation of an invoice and the balance after payment is received from the customer. Invoice discounting helps in getting funds instantly, which will enhance the cash flow of the business. in a normal scenario, this facility is customer-specific and according to the bank policy with the customer. The bank will look into the repayment capacity of the customers, the credibility of the borrower, and further protection before discounting the invoice.
- Bonds or Guarantees : Bonds or guarantees are facilities provided by a bank to provide protection to the buyer in case of failure by the seller to settle the obligation. The buyer gets compensation from the bank when the seller fails to deliver the ordered goods. These are majorly used in the construction industry or for specific projects. The different kinds of bonds or guarantees on the ‘on-demand and ‘conditional’ classes include tender bonds, advance payment bonds, performance bonds, retention bonds, and payment guarantees.
Benefits of Trade Finance in Dubai
- Trade finance in Dubai will help in the development of the business by getting financial support from the banks and other financial institutions, which is essential to conduct the business activities of a trading company.
- Trade finance would support businesses that don’t have sufficient cash flow or working capital to complete the business requirements. Trade finance will relieve from a cash crunch, blocked money on unsold inventory, and extend the credit period of clients, to a fixed extent.
- Trade finance, based on some pre-agreed terms, will help the business to provide a more competitive price and conditions to the customers and suppliers by ensuring timely guarantee payment to the suppliers. This would also support the business from cash shortages or liquidity gaps by providing options of the overdraft, terms loan, customer invoice discounting, etc.
If you are looking for trade finance in Dubai then we at Taskmaster will help you in this process. We provide the best services of trade finance and make your process efficient.
Also check, Different Types of Financial Instruments