#documentary collections

SMEs ie. Small & medium-sized enterprises play a vital role when it comes to strengthening the economy, especially in developing countries. They represent about 95% of the global economy and are considered an important contributor to job creation with a significant majority of the business worldwide. But thanks to the sudden outbreak of the global pandemic of Covid-19, businesses in all sectors are facing an economic crunch and are becoming risk-averse, especially for international trade finance.

SMEs have limited access to financial services and one of the biggest challenges they are facing when exporting is to secure affordable & flexible financing from banks. They need working capital to run their overseas transactions smoothly but traditional banks don’t often provide lending solutions to companies with smaller balance sheets. Here, one of the best & affordable ways to survive in the international market is to apply for trade finance from various international trade finance providers like Axios Credit Bank. They enable SMEs to not only fulfill their efficient cash flow requirements with an instant fund but also finance their overseas transactions across the world. Now SMEs can have several alternative financing solutions which are specially tailored as per their business needs.

In this blog, find out why trade finance is beneficial for small & medium-sized businesses. Let’s start:

It Eliminates Breach of Trust in International Trade

Undoubtedly When two unknown parties across the borders having different rules & regulations enter into a contract, they are at risk of trust breach. The lack of surety in paying & performing the T&C of the agreement can turn down a business opportunity for parties-to-the-contract. Here, using trade finance instruments like Letters of Credit can help SMEs mitigate these risks as well as build trustworthy & strong global trade finance relationships. While operating in the global market, having a trade deal backed by an intermediary i.e. legal authority like a Bank or an FI provides SMEs peace of mind, establishes credibility and surety of payment on time.

A type of financing known as trade finance is created especially to support transactions involving international trade. It gives companies that import and export products and services access to short-term working capital, assisting them in managing the risks involved in international trade. Short-term working cash can be obtained through a variety of trade finance services, including:

1. Letters of Credit: A letter of credit is a document that, under certain circumstances, a bank issues to a seller of products or services to guarantee payment. This can lessen the seller's risk of not getting paid and give them the working capital they require to complete the transaction.

2. Documentary Collections: A documentary collection is a payment strategy in which the buyer and seller trade documents and money through the help of banks. Given that the seller can get paid after presenting the required paperwork, this can be a helpful way to get short-term operating capital.

3. Invoice Financing: Getting short-term working cash through invoice financing entails using invoices as collateral. Businesses that have unpaid invoices that are approaching their due date but require cash sooner to meet their own financial responsibilities may find this to be a useful option.

4. Supply Chain Finance: Financing the complete supply chain, from raw materials to finished goods, is known as supply chain finance. Given that it offers financing throughout the entire production cycle, this can be a helpful way to acquire short-term working capital.

Standby Letter of Credit

Performance Guarantees

Trade transactions involve a series of formalities and legal criteria that end up complicating the payment process. That’s why several payment methods and procedures have been determined to facilitate a smooth undertaking between the exporters and importers. One of such processes is Documentary Collection through which the bank of the exporter becomes liable to receive the payment for the shipped goods from the importer’s bank. The details of the entire trade transaction are recorded in a document that is provided to the importer’s bank in exchange for the goods. The exporter’s bank is authorized by the exporter to serve as a collection agent for the payment. This simplified procedure makes Documentary Collection or D/C a safe, reliable, and quick way to facilitate genial trade transactions.

To receive the shipped goods without any hassle, the importer needs shipping documents from the exporter that help in clearing the customs. These delivery documents include a business invoice, a packing list, and a certificate of origin, an insurance certificate, and a bill of trade. The bill of trade, also known as the bill of the draft, serves as a formal application for the payment from the exporter to the importer.

The process of Documentary Collection may involve direct payment or the promise of payment from the importer’s bank. Based on this factor, the D/C can be divided into two categories:

● Document against acceptance, and

● Document against payment

The meaning of both these processes is clear from their names.

Document against Acceptance or D/A defines a specific date on which the importer needs to pay for the shipped goods in the future. It involves a pledge to pay on the part of the importer; it is called a time draft. On the acceptance of the time draft by the importer, the documents are released by the bank. On the other hand, the Document against Payment or a D/P demands the importer to make the payment even before the bank issues the documents. That’s why it is also known as ‘Cash against Document’ or ‘Sight Draft’.

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