TRADE FINANCE IN DUBAI

Working Capital

Working Capital is the difference between Current Assets (Cash + Inventory + Accounts Receivable) – Current Liabilities (Accounts Payable + Short Term Borrowing + Accrued Liabilities).

It is essential to study the operational cycle from procurement of raw material/inventory till payment to the suppliers, i.e., from the point at which the company procures raw material till the payment is received on sale of goods and payment is made to the suppliers. The number of days taken in this conversion cycle is very relevant for the analysis of working capital. Based on this analysis, the finance team can identify the working capital gap and plan to source the fund to fill the gap.

Term Loans

A term loan is an advance received from the bank which has to be repaid in a specific number of installments. Term loans charge a rate of interest, either fixed or fluctuating, which has to be paid along with the fixed installment. Businesses generally avail Term loans for the purchase of fixed assets. Term loans can be categorized based on the tenure of the loan as Short Term Loan, Intermediate-Term Loan, and Long Term Loan. A Term loan can also require collateral to reduce the risk of default of payment.

Letter of Credit

Documentary Credit, or commonly called Letter of Credit (LC), is an irrevocable undertaking issued by a bank whereby the bank undertakes to make payment to a beneficiary provided documents as per the LC are presented, and all terms and conditions are complied with. In an International Trade, the Exporter and the Importer use an intermediary such as a bank to guarantee the payments and delivery of goods, due to factors like distance, uncertainty on the genuineness of a party, etc. In case the buyer is unable to make the payment, the bank will be required to cover the full amount.

Benefits of Letter of Credit

To the buyer

1. Non – Fund based facility
2. Interest-free financing option

To the seller

1. Minimizes Credit Risk
2.  Avail pre-shipment finance against the LC
3. Timely receipt of money

Receivable Discounting

Invoice Discounting: Invoice discounting allows a business to immediately receive a part of the raised invoice amount on presenting the invoice and the balance is received after the payment is received from the customer. Invoice Discounting helps obtain funds immediately, which will increase the Cash Flow of the business. In a normal scenario, this facility is customer-specific and as per the Bank policy with the customer. The bank will look at the payment capacity of the customers, the trustworthiness of the borrower, and further security before discounting an invoice.

Cheque discounting: Cheque discounting is a facility provided by the bank wherein the bank finances the transaction and provides funds before the due date of a PDC issued by a customer. Through this arrangement, the supplier gets the payment immediately allowing the customer to enjoy a credit period to make payment.

Bonds or Guarantees

Bonds or Guarantees are facilities extended by a bank that provides the buyer security in case of failure by the seller to settle the obligation. The buyer receives compensation from the bank when the seller fails to deliver the ordered goods. These are mainly used in the Construction industry or for specific projects. The different types of bonds or Guarantees based on ‘on-demand’ and ‘conditional’ classes include Tender Bond, Performance Bond, Advance Payment Bond, Retention Bond, and Payment guarantee.