A trade loan is a financing facility for a business to gain working capital to pay for raw materials, production, inventory, suppliers, and other trade expenses before customers pay back after an agreed credit timeline.
Trade loans can help in different stages of transactions, such as pre-shipment finance, which allows exporters to process goods for shipping, and post-shipment finance, which helps to boost working capital between the shipment of the goods and receiving payments from the buyer.
How It Works:
- A business requires funds for a trade transaction.
- A lender provides a short term loan.
- Funds are used for procurement or shipment.
- The loan is repaid after completion of the transaction.
Benefits:
- Provides immediate access to funds for trade execution
- Supports working capital requirements for buying and selling goods
- Enables timely fulfillment of business orders
- Improves liquidity during high volume trading cycles
Example:
An Indian exporter receives a Rs 20 lakh order from a buyer in Germany but needs Rs 12 lakh to purchase raw materials. The exporter can opt for pre-shipment trade finance to gain working capital for producing goods. Later, the exporter can repay the amount once the invoice is cleared.