What is trade finance?
Trade finance can be thought of as a type of support for the transfer of goods and services back and forth. It provides a means to allow funding between those parties involved in the selling of merchandise or services and those parties wanting to purchase them. Trade finance is especially important in trading across borders.
Trade finance enables exporters to receive capital immediately after merchandise has been shipped or services rendered. This timely injection of funds mitigates operational risk and enhances the cash-flow of a business.
Trade finance enables importers to purchase goods or services which may be critical to their business. In this way, they do not need to wait for outstanding funds from elsewhere. Here too, this timely injection of funds mitigates operational risks and increases cash-flow.
The Mechanism of Trade Finance
Introduction of capital by financiers: assisting exporter to ship merchandise or provide services.
Fund payment and collection by service provider
Logistics (If applicable)
Introduction of capital by financiers: assisting importer to purchase merchandise or services.
Why has trade finance become so popular?
Traditional finance service providers - such as banks - struggle to adapt to the rigorous regulatory environment that exists for small and medium enterprise, and especially in parts of the world where the marketplace is less mature. Specialists, such as those at Nu-Credits, are able to expedite trade by providing finance which bridges the gap.
Furthermore, the trade finance sector demonstrates a rare characteristic: it is inherently low risk since capital recovery rates tend to be quite high.
The industry then, is attractive to investment and exhibits a diversified investment profile.
A Flourishing Market
Trade finance caters for almost all global trade and as time has passed, this support has continued to grow.
Before a client can be appraised for investment, they must submit their financial history. Because of this, financiers such as Nu-Credits are able to mitigate risk since they are able to assess and understand the business of their client.
The term of a contract is usually short. This enables financiers such as Nu-Credits to tailor the investment profile to accommodate the capital growth of the business.
- Average Default Rate -
The average default rate of a loan is typically quadruple that of a trade finance product.