Letters of credit (LC), import bills for collection, shipping guarantees, import financing, performance bonds, export LC advising, LC safekeeping, LC confirmation, LC checking and negotiation, pre-shipment export finance, export bills for collections, invoice financing, and all the relevant document preparation.
Despite this focus on the LC, over the years the term trade finance has been shifting away from this sometimes cumbersome method of conducting business. It is now estimated that over 80% of global trade is conducted on an open account basis.
Led by large corporates, this form of trade saves costs and time and so has been adopted by smaller corporates as they become more comfortable with their buyer and supplier relationships. Open account transactions can be described as ‘buy now, pay later’ and are more like regular payments for a continuing flow of goods rather than specific transactions. This is much cheaper for corporates.
In response to this development, the organisation SWIFT launched the TSU (trade services utility), a collaborative centralised data matching utility, which allows banks to build products around its core functionality to improve the speed and flow of open account trade. This is helping banks re-intermediate themselves into these trade flows.
While volumes of LCs have remained flat in recent years, their value actually increased and they remain an essential part of emerging market trade and trade in countries where exchange controls are in force. This increase in value is also a reflection of the commodity price boom of 2007/08.
Factoring & Forfaiting
Factoring, or invoice discounting, receivables factoring or debtor financing, is where a company buys a debt or invoice from another company. In this purchase, accounts receivable are discounted in order to allow the buyer to make a profit upon the settlement of the debt. Essentially factoring transfers the ownership of accounts to another party that then chases up the debt.
Factoring therefore relieves the first party of a debt for less than the total amount providing them with working capital to continue trading, while the buyer, or factor, chases up the debt for the full amount and profits when it is paid. The factor is required to pay additional fees, typically a small percentage, once the debt has been settled. The factor may also offer a discount to the indebted party.
Forfaiting (note the spelling) is the purchase of an exporter's receivables – the amount importers owe the exporter – at a discount by paying cash. The purchaser of the receivables, or forfaiter, must now be paid by the importer to settle the debt.
As the receivables are usually guaranteed by the importer's bank, the forfaiter frees the exporter from the risk of non-payment by the importer. The receivables have then become a form of debt instrument that can be sold on the secondary market as bills of exchange or promissory notes.
Despite this focus on the LC, over the years the term trade finance has been shifting away from this sometimes cumbersome method of conducting business. It is now estimated that over 80% of global trade is conducted on an open account basis.
Led by large corporates, this form of trade saves costs and time and so has been adopted by smaller corporates as they become more comfortable with their buyer and supplier relationships. Open account transactions can be described as ‘buy now, pay later’ and are more like regular payments for a continuing flow of goods rather than specific transactions. This is much cheaper for corporates.
In response to this development, the organisation SWIFT launched the TSU (trade services utility), a collaborative centralised data matching utility, which allows banks to build products around its core functionality to improve the speed and flow of open account trade. This is helping banks re-intermediate themselves into these trade flows.
While volumes of LCs have remained flat in recent years, their value actually increased and they remain an essential part of emerging market trade and trade in countries where exchange controls are in force. This increase in value is also a reflection of the commodity price boom of 2007/08.
Factoring & Forfaiting
Factoring, or invoice discounting, receivables factoring or debtor financing, is where a company buys a debt or invoice from another company. In this purchase, accounts receivable are discounted in order to allow the buyer to make a profit upon the settlement of the debt. Essentially factoring transfers the ownership of accounts to another party that then chases up the debt.
Factoring therefore relieves the first party of a debt for less than the total amount providing them with working capital to continue trading, while the buyer, or factor, chases up the debt for the full amount and profits when it is paid. The factor is required to pay additional fees, typically a small percentage, once the debt has been settled. The factor may also offer a discount to the indebted party.
Forfaiting (note the spelling) is the purchase of an exporter's receivables – the amount importers owe the exporter – at a discount by paying cash. The purchaser of the receivables, or forfaiter, must now be paid by the importer to settle the debt.
As the receivables are usually guaranteed by the importer's bank, the forfaiter frees the exporter from the risk of non-payment by the importer. The receivables have then become a form of debt instrument that can be sold on the secondary market as bills of exchange or promissory notes.