A ppt on trade finance helps the student for knowing about trade finance.

1. A
PROJECT REPORT
ON
“TRADE FINANCE”
SUBMITTED
To
IN PARTIAL FULFILMENT OF DEGREE OF
MASTERS OF BUSINESS ADMISTRATION
STUDENT NAME:-
PRN: - BATCH 2020-2022

2. INTRODUCTION
Trade Finance
 What is Trade finance?
 How trade finance works?
 Purchase Order Finance,
 Structured Commodity Finance,
 Invoice Finance (Discounting & Factoring),
 Supply Chain Finance, Letters of Credit (LCs) and Bonds & Guarantees.
Trade finance products
• Term Loans.
• Working Capital Limits like Overdraft and Cash Credit.
• Letters of Credit.
• Invoice Discounting or Invoice Factoring.
• Export Credit (Packing Credit)
• Insurance.

3. What is Trade Finance?
Trade finance is the financing of international
trade flows. It exists to mitigate, or reduce, the
risks involved in an international trade
transaction.
There are two players in a trade transaction:
• an exporter, who requires payment for their
goods or services,
• an importer who wants to make sure they
are paying for the correct quality and
quantity of goods.

4. How Trade Finance Works
The function of trade finance is to introduce a third-party to transactions to remove the payment risk and the supply risk.
Trade finance provides the exporter with receivables or payment according to the agreement while the importer might be
extended credit to fulfil the trade order.

5. The parties involved in trade finance are numerous and can include:
o Banks
o Trade finance companies
o Importers and exporters
o Insurers
o Export credit agencies and service providers
• Lending lines of credit can be issued by banks to help both importers
and exporters.
• Letters of credit reduce the risk associated with global trade since the
buyer's bank guarantees payment to the seller for the goods shipped.
However, the buyer is also protected since payment will not be made
unless the terms in the LC are met by the seller. Both parties have to
honour the agreement for the transaction to go through.
• Factoring is when companies are paid based on a percentage of their
accounts receivables.
• Export credit or working capital can be supplied to exporters.
• Insurance can be used for shipping and the delivery of goods and can
also protect the exporter from non-payment by the buyer.

6. What are Risks?
Doing business across borders is riskier than doing business domestically. There are additional elements such as the laws
and regulations of foreign jurisdictions, availability of foreign currency and its conversion, and the logistics of exporting and
importing, that must all be considered.
Trade finance plays an important role in supporting international trade and mitigating some of these risks for buyers and
sellers. The World Trade Organization estimates that 80 to 90 per cent of world trade relies on trade finance in some form.
However, the risks in international trade are not just borne by the importer and exporter. Banks and other finance providers
(collectively “finance providers”) provide financing in a variety of ways and are exposed to their own risks while doing so.
The risks discussed are:
• Counter-party risks
• Country risks
• FX risks
• Dilution risks
• Insolvency risks
• Fraud risks
• Compliance risks

7. TRADE FINANCE TYPES

8. PURCHASE ORDER
A purchase order, or
PO, is an official
document issued by a
buyer committing to
pay the seller for the
sale of specific
products or services
to be delivered in the
future. The advantage
to the buyer is the
ability to place an order
without immediate
payment.

9. Structured commodity finance
Structured commodity finance (SCF) as covered by
Trade Finance is split into three main commodity
groups: metals & mining, energy, and soft commodities
(agricultural crops).
SCF is a financing technique utilized by a number of
different companies, primarily producers, trading
houses and lenders. Commodity producers stand to
benefit from SCF by receiving financing to ensure cash
flow is available for maximum output with the
intention of repaying the loan once exports begin.
Trading houses employ SCF largely as a means of risk
mitigation to reduce their exposure to a single country
or commodity; SCF allows them to mitigate any supply,
demand or price shocks. Lenders seek out
opportunities to help assist commodity producers in
accessing new markets and customers, this also
benefits them through gaining interest on the loan.

10. Invoice Finance (Discounting & Factoring)
Invoice financing is a way for businesses
to borrow money against the amounts
due from customers. Invoice financing
helps businesses improve cash flow, pay
employees and suppliers, and reinvest in
operations and growth earlier than they
could if they had to wait until their
customers paid their balances in full.
Businesses pay a percentage of the
invoice amount to the lender as a fee for
borrowing the money. Invoice financing
can solve problems associated with
customers taking a long time to pay as
well as difficulties obtaining other types
of business credit.

11. Factoring is a type of finance in which a business would sell
its accounts receivable (invoices) to a third party to meet
its short-term liquidity needs. Under the transaction
between both parties, the factor would pay the amount due on
the invoices minus its commission or fees.
Discounting is a financial mechanism in which a debtor
obtains the right to delay payments to a creditor, for a defined
period of time, in exchange for a charge or fee. Essentially,
the party that owes money in the present purchases the right to
delay the payment until some future date.
DISCOUNTING FACTORING

12. What is supply chain finance?
Supply chain finance (or SCF) is a form of supplier finance in
which suppliers can receive early payment on their invoices.
Supply chain finance reduces the risk of supply chain disruption
and enables both buyers and suppliers to optimize their working
capital. It’s also known as reverse factoring.
Unlike other receivables finance techniques like factoring, supply
chain finance is set-up by the buyer instead of by the supplier.
Another key difference is that suppliers can access supply chain
finance at a funding cost based on the buyer’s credit rating,
rather than their own. As a result, suppliers are typically able to
receive supply chain finance at a lower cost than they can
otherwise access.
The term ‘supply chain finance’ is also sometimes used to
describe a broader range of supplier financing solutions,
including solutions like dynamic discounting, in which the buyer
funds the program by enabling suppliers to access early payment
on invoices in exchange for an early payment discount. However,
the term is more commonly used as a synonym for reverse
factoring.

13. Letter of Credit
A Letter of Credit (LC) is a document that
guarantees the buyer’s payment to the sellers. It is
issued by a bank and ensures timely and full
payment to the seller. If the buyer is unable to make
such a payment, the bank covers the full or the
remaining amount on behalf of the buyer.
A letter of credit is issued against a pledge of
securities or cash. Banks typically collect a fee, i.e.,
a percentage of the size/amount of the letter of
credit.
The letters of credit can be divided into the
following categories:
• Sight Credit
• Acceptance Credit/ Time Credit
• Revocable and Irrevocable Credit
• Confirmed Credit

14. Bonds and Guarantees
Bonds are used by governments and corporations to raise money
and finance needed projects. A bond resembles an I.O.U.
between a lender (the bondholder) and the borrower (the entity
that issues the bond). The entity issues a bond at a par value,
usually in denominations of $100 with a stated coupon rate. An
investor effectively lends the bond issuer $100 and receives
coupon payments from the entity that issued the bond until the
$100 par value is repaid by the entity that borrowed the money.
A Bank guarantee is not a debt instrument or a loan in itself.
It is a guarantee by a lending institution that the bank will assume
the costs if a borrower defaults on its liabilities or obligations. A
bank guarantee is often a provision placed in a bank loan prior to
the bank agreeing to loan out the money. The bank will charge a
fee for the guarantee. A bank guarantee encourages companies and
private consumers to make purchases they otherwise would not make, which increases business activity and consumption
and provides entrepreneurial opportunities.

15. Trade Finance Products in India
Trade finance is the financial assistance provided in the field of international
trade and commerce through the use of various financial products. A plethora
of financial products fall under the ambit of international trade finance, each
of which is designed to ease the conduct of business among importers and exporters
around the world.
Types of Trade Finance available in India
The nature and purpose of trade finance are quite different from the usual
financing of products and services. As such, trade finance products are
unlike conventional financing products. Some typical trade finance products available in
India are listed below:
• Term Loans
• Working Capital Limits like
• Overdraft and Cash Credit
• Letters of Credit
• Invoice Discounting or Invoice
• Factoring
• Export Credit (Packing Credit)
• Insurance

16. SUMMARY
The project “Trade Finance” is a detailed study of the import, export and foreign exchange market. The
project has explained the need for trade finance and introduced some of the most common trade finance tools
and practices. Recent times have witnessed remarkable growth in international transactions. With the fast
growing international oriented transactions in business enterprise. The different areas which play vital role in
growth of global trade finance market such as methods of payment of international trade, letter of credit ,
bonds & guarantees, discounting & factoring , concept of forfeiting , factoring, and buyers credit. Trade
finance signifies financing for trade, and it concerns both domestic and international trade transactions. But
problem coming in trade finance due to Trade wars, sluggish economic activity, and COVID-19 induced
lockdowns that have disrupted the global supply chain, leading to a higher proportion of trade linked defaults.
The future of trade finance, which has traditionally been a paper and people heavy business, lies in
digitalization. It is an exciting – albeit disruptive – time for trade finance. Firstly, the introduction of a host of
technologies such as blockchain, big data, and artificial intelligence (AI) is redefining the way in which trade
finance business is conducted. Trade finance has traditionally been largely paper based, but the oncoming
digital upheaval stands to benefit the industry at large, opening the way for new participants. Digitalizing
trade finance is no doubt a transformative process one that will facilitate the convergence of physical,
financial and documentary chains. Cost reduction is one obvious benefit of this through automating processes
and reducing operational costs. This, in turn, leads to improvements in balance-sheet health and also
contributes to working capital management.