Trade Financing


While trading overseas there is a burden on a business cash flow along with delays and complications. One needs to keep a track of freight charges and tariffs to ensure there is no loss associated while trading overseas. 

Trade Financing or import financing specializes in overcoming these challenges and also spares the working capital for investing in the growing businesses.


Trade Finance helps to bridge the funding gap between a credit order and the payment to an overseas supplier. This eases the cash flow pressure. There are two types of credit facility to the importer – buyer’s credit and supplier’s credit. 

Buyer’s Credit finance means finance for payment of imports arranged by the importer from a bank or a financial institution outside the country. The finance is based on a guarantee given by the importer’s bank. This credit facility may be extended either from an overseas branch of the domestic bank or an international bank in foreign country. This helps local importers to access cheaper foreign funds, close to cheaper LIBOR rates compared to local sourcing of funds. If one took a rupee loan, the rate is around 9-10 percent, but in buyer’s credit, the interest rate is around 2.5 percent. 

Supplier’s Credit has credit extended directly by the overseas supplier (exporter) to the buyer (importer) instead of a bank or a financial institution for imports. The supplier’s credit means credit extended to the buyer (importer) for imports directly by the overseas supplier (exporter). This is done directly from the supplier instead of a bank or a financial institution for imports. The exporter is also the trade creditor. Therefore the exporter doesn’t have to ask for payment under sight Letter of Credit under supplier credit.

The ab-initio contract period should be 6 months for all trade credits (buyer’s credit or supplier’s credit), which can be rolled over in multiple of 6 months up to 5 years. Banks issue letter of credit (LC) or letter of undertaking (LoU) or letter of comfort (LoC) in favour of overseas supplier, bank or financial institution.

Earlier the tenure allowed for import of raw material was up to 360 days, prior to RBI circular July 13, 2013, many importers used to borrow under buyer’s credit for the period more than what an operating cycle of a unit required as the borrowing rate was cheap, which also exposes them to un-hedged currency risk. Thus in the circular, RBI linked the period of trade credit to operating cycle and trade transactions. This has stopped the rollover of buyer’s credit. It has also stopped importers who were using buyer’s credit facility for arbitrage to earn profits out of it. After the reporting of Punjab National Bank fraudulent transactions of about $2 billion, the $85 billion of Indian buyer’s credit has come to a grinding halt.

Read more about Foreign Currency Exchange

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