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Does Trade Finance in Singapore Require a Collateral?

For a lot of business owners in Singapore, a business loan is just a business loan. However, there are dozens of different financing options tailored to different types of companies, operating styles, and types of businesses. Research and preparation are key, like anything else in the business.

Taking the time to fully understand the types of finance that are available to you can be of real benefit to your business in the long term–even if it means making time available in the short term to get it right. For example, low-doc or non-doc loans are usually best suited to self-employed individuals who are unable to provide the banks with the detailed documentation needed for traditional business loans.

It works especially well for companies with a successful trading record, two or more years of credit, a good credit score, and a positive cash flow.

What is Trade Finance?

Trade Finance is a loan that provides payment on behalf of the importer to an exporter before the goods have arrived. The lender will loan money to the importer so that once the goods have been shipped, the exporter can be paid.

Is There A Collateral?

Goods in transit are usually the collateral for these loans. Trade finance tools come in the form of credit letters, export factoring, export credits, insurance, or lending facilities. Most commercial finance loans are short-term, as they facilitate the purchase of goods and are then paid off once the goods are resold on the market.

Because trade finance in Singapore is short-term, most businesses will have to take out a separate trade loan for a particular transaction. For example, if you run a company that imports bananas into Singapore, a single shipment of bananas will be the trade loan you are applying for.

Once you receive the bananas, store them and sell them to other retailers, you pay back the loan, and when you are ready for another shipment of bananas, you will need to reapply for another loan.

On a global scale, it is estimated that 80 to 90 percent of global trade depends on some sort of option for trade finance loans.

The Benefits of Trade Finance

Trade finance or a commercial loan can help businesses to continue their business practices when the capital costs are high. Moreover, since profitability increases with larger volumes, these loans can also help to increase the profit margin of import, export, and domestic trading companies.

Trade Finance Can Help Mitigate Risk

Like many business practices, businesses working in import, export, and domestic trade are living in a high-risk, high-reward world. Late payments can effectively cripple a company due to large moves of capital.

Returning to our hypothetical banana company, for example, let’s imagine this company wanted to try not to take on any kind of commercial finance loan. They invested $75,000 in several containers of imported bananas, with an available cash flow of $100,000, and then sold those bananas to retailers around the country.

Several of their clients have asked for credit so that they can purchase bananas. Due to the lack of available cash, if one or more of their clients defaulted on their payment, the company would be left without the resources needed to reinvest in the next shipment of bananas.

This would make it necessary for them to reduce their volume and therefore pay a premium price for lower-volume shipments and reduce their profitability. A short-term finance loan would help to reduce this vulnerability and give the company more flexibility to operate its import business.

Trade finance in Singapore helps small and medium-sized enterprises. While a multi-trillion dollar transnational corporation may be able to make huge volume purchases without the need for finance, small and medium-sized enterprises are absolutely dependent on such loans to be able to buy in large quantities and compete with the “big boys.”