Trade Finance and Letters of Credit

Trade finance is another lending solution available to assist businesses in managing their cash flow effectively. This specific method is of particular relevance for businesses that are importing products from, or exporting to, an overseas destination – although can be drawn on for domestic use.

Trade finance has been designed to fill the working capital cycle gap, which may be experienced when goods are en route. It may also provide the parties involved with an added layer of protection via Letters of Credit.

A Letter of Credit is a promise from the receiver’s bank to the sender’s bank. Once the goods have arrived safely at the destination, the receiver’s bank will pay the sender’s bank the money owed for the goods that have been shipped.

The trade finance method offers businesses various benefits through Letters of Credit. It is also highly flexible, with loans able to be taken out in different currencies and different forms, making them interchangeable depending on the situation at hand. Some lenders also offer ways to minimise the risk associated with currency fluctuations and to prevent any unforeseen or unfavourable currency movements.

However, there are a handful of cons associated with trade finance. It is highly specific, short-term, and may require property security or a robust business balance sheet to access funding. If you are looking for a longer-term finance solution, you may need to consider alternative working capital facilities.

Duo can help you to determine whether this method is right for your business. Reach out today to find out more.