Trade Loans: What Are They? Are They Any Good?

Trade loans

When it comes to getting financing, small businesses often have a lot of different options. Business loans are probably the most common, but there are also other financing methods out there that might be even better for your business. The alternative lending market is booming right now, and one of the more interesting sub-segments is called microloan trade financing.

These so-called trade loans are often much smaller than traditional business loans, making them a good option for smaller businesses that don’t need a lot of capital to get started. So what exactly is trade loan financing? Are they worth your time? Keep reading to learn more about this unique type of financing and whether or not it could work for you.

What are Trade Loans?

Trade loans are flexible, short-term borrowing facilities, linked to specific import or export transactions.

They are available for firms regardless of the method they use to trade, whether open account, collections, or documentary credit basis. Trade loans help fund trade transactions throughout a firm’s trading cycle, improving its cash flow.

Trade loans work as fully revolving credit facilities, which help fund a business between the time it has to pay for the purchased goods, and the time when the firm receives the funds from the sale of those goods. Once the facility is agreed upon and put in place, the borrower presents his drawn-down documentation. Any drawn-down documentation is agreed upon in advance and stipulated in the facility agreement. This normally includes invoices and transport documents, but depending on the type of agreement, the lender may or may not have control over the transport documents.

Common use of Trade loans

Trade loans are an important and well-established trade finance technique. Particularly suited to wholesalers and manufacturers, they can be used for regular or one-off purchases of goods and raw materials.

Costs To Consider in Trade Loans

Three main costs need to be considered:

  • The main cost is generally interest on the owed amount. Interest is charged and will vary depending on the risk of default. Other fees may be applicable, depending on the type of loan, tenor, and lender
  • Arrangement fees are commitment or administration charges payable to the lender to reserve the funds and cover opening costs. Fees will vary depending on the complexity of the business, its size, and the risk
  • Trade loans are normally provided in conjunction with other trade products (such as documentary credits), and the cost of these needs to be taken into account when considering affordability.

Time Duration

The time duration for receiving a trade loan will vary, depending on the complexity of the deal. Typically it takes between one and two weeks.

Trade Financing By Mwananchi Credit Ltd.

Mwananchi Credit Limited Offers Online Various Types Of Trade Finance Products To Assist Customers Tender, Perform For Contracts, Expand Business Activity, And Provide Working Capital.

Our trade finance products in Kenya include;

Bid Bonds

Most bidders are required to prepare a bid bond which is usually a percentage of the bid price during the tendering process. A bid bond could run into a significantly huge amount which could end up tying down a considerable percentage of the limited working capital for the business

  • We advance bid bond in 30 minutes.
  • With absolutely no cash cover or collateral.
  • negotiated fee.

Performance Bond

After the award of the contract, some company requires a performance bond which is a security document that guarantees the applicant due and proper performance of contractual obligations in an underlying contract.

  • Flexible security or collateral.
  • Also enjoy flexible fee payment terms for guarantee.
  • Fast turnaround time.
  • Reliable we strive to always deliver.
  • Transparent no hidden charges in our fee structure.

Advanced Payment Guarantee (A.P.G)

This is a guarantee given by a party receiving payment in advance from a client. If the party receiving this payment in advance does not fulfill its obligations under the contract, the client will be called up the guarantee to recover the money paid in advance

  • Flexible security or collateral.
  • Also enjoy flexible fee payment terms for guarantee.
  • Fast turnaround time.
  • Reliable we strive to always deliver.
  • Transparent no hidden charges in our fee structure.

Invoice Discounting

These short-term loan financing should be one month in mwananchi credit limited. We discount 50% of the invoice amount that is supplied while waiting for payment. Must be from reputable institutions.

  • Copy of the original invoice duly acknowledged by the procuring entity.
  • Delivery notes for the goods supplied.
  • Letter of assignment of the receivables executed by the procuring entity.
  • Latest bank statements for the business

LPO Financing

These short-term loan financing should be a minimum of one month to a maximum of 90 days in mwananchi credit limited. We do LPO financing at a reasonable rate that MUST be fully secured by either logbook or title deed.

  • Original LPO/ LSO/ Contract.
  • Pro-forma invoices for the goods to be supplied/ break-down of costs.
  • Tangible security e.g. Logbook or Title Deed.
  • Evidence of similar past jobs done through past invoices and delivery notes.

Advantages of Trade Loans

  • Allows firms to pay suppliers on time while receiving extended credit terms
  • Is structured to suit a firm’s trading cycle
  • Allows firms to accept quick payment terms from suppliers, enhancing the reputation
  • If customers require funding for their working capital needs, trade loans offer transaction-specific financing and may reduce their overall borrowing costs
  • Customers can use trade loans to pay import collections and import letters of credit at the sight while extending their working capital
  • Normally available in all major currencies.

Disadvantages of Trade Loans

  • Due to their short-term nature, the interest charged can be higher than for business loans or commercial mortgages
  • As with other types of debt, if the loan is secured on the goods being purchased or on other security, and the business fails to repay, the lender may take action to seize the security provided for the loan
  • Defaults on loan repayments can lead to a fall in credit score, increased interest rates for existing and future loans, collateral being seized, and legal proceedings against the company. Company directors may also be personally affected, depending on how the loan was structured.

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