UAE is a trading hub and home to the free zones and hence it is known for re-exports. SMEs and Expatriate entrepreneurs in the UAE may find it challenging to run a business especially trading if they are unfamiliar with the banking practices in the region. However, providers of corporate finance services in Dubai, UAE help business owners easily navigate this challenge. Corporate finance service is an umbrella term that covers many aspects and methods and the most common of them is trade financing services. Trade finance services in Dubai, UAE allow business owners to trade with local and international markets without any hardship.
Trade finance service providers in Dubai offer financial assistance to facilitate both international and local trading transactions with the help of various financial products. In layman’s language, trade finance can be defined as the funding and support provided to businesses to carry out a trading activity.
Usually, banks and other financial institutions provide trade financing to businesses. If a company has some trade deals available and banks refuse to assist the firm, trade finance service providers in Dubai may step in. Assistance is provided through bank/credit facilities such as Trust Receipts (TR), Letter of credit (LC), Bank Guarantee (BG), and overdrafts (OD) for trading companies.
Types of Trade Finance Options
The strong focus on trading in the region has created an increased demand for trade financing in the UAE. Traders are especially required to avail of trade financing services in Dubai when they have an order that is larger than their financial capability or the traders who look for expansion. Importers, exporters, contractors, developers, and manufacturers require various types of trade financing to meet their financial needs. Some of the most sought after types of trade finance services in Dubai are given below:
Letters of Credit
A documentary LC is issued by a bank as an irrevocable undertaking, which is the most secure banking instrument available for traders. Under an LC arrangement, banks undertake to pay to the beneficiary given all the documents as per the LC are presented and the trader complies with all the terms and conditions. While carrying out an international trade, exporters and importers involved in the deal use banks as an intermediary to guarantee the payments and delivery of goods.
They require such a guarantee to navigate challenges such as distance, uncertainty on the genuineness of a party, etc. The bank is required to cover the total amount in case the buyer is unable to make the payment. The LC offers the benefit of a non-fund based facility and interest-free financing option to the buyer. Meanwhile, the buyer gets benefits such as low credit risk, availability of pre-shipment finance against the LC, and timely receipt of money.
Traders often have to encounter a situation where they lack adequate capital to purchase merchandise. In such situations, banks may lend them the required resources retaining ownership rights through a trust receipt transaction. Under the trust receipt agreement, the company agrees to repay the bank after it sells the merchandise. Trust receipts are especially useful for distributors and dealers who sell expensive goods. Trust receipt arrangements are classified as asset-based lending. Providers of trade financing services in Dubai can help the companies prepare the documentation for trust receipt arrangements.
Bank guarantees are used in projects where two parties are under obligation to carry out some duties to complete a transaction. In such projects, both parties use the bank guarantee to show their credibility and financial health. A bank guarantee helps the companies to mitigate risks generated by both sides of the transaction. The role of a bank guarantee is huge in facilitating high-value transactions.
If one of the parties fails, the other party can invoke a bank guarantee by filing a claim with a lender and receiving a guaranteed amount. Unlike an LC, a bank guarantee safeguards both the parties involved in the transaction. Even though a bank guarantee safeguards both parties it favours the beneficiary. Bank guarantees are often used by contractors bidding for larger projects such as construction or infrastructure projects.
Overdrafts are one of the most common methods of financing services availed by SMEs and companies with fluctuating finance requirements. A company tries to obtain an overdraft facility when it is forced to make payments out of its current account, exceeding its available balance. Business overdrafts can be either obtained over a fixed time or as a rolling facility with no end date. Overdrafts help to ease the pressures on working capital and can be used as a backup for unexpected expenditures. Overdrafts are ideal for companies that face fluctuations in working capital.
Benefits of Availing Trade Finance Services in Dubai, UAE
Corporate financing, especially trade financing promotes business growth by helping traders to secure necessary funds for purchasing goods and stock. Obtaining trade financing helps businesses to offer competitive terms to suppliers as well as customers. Trade finance services in Dubai helps businesses to minimize payment gaps in their trade cycle and bolster supply chain relationships and growth. Trade financing options from corporate finance service providers in Dubai offer the following benefits as well:
- Short-to-medium working capital enhances the revenue potential of a company, and early payments allow for higher margins
- It enables companies to ask for higher volumes of stock or place bigger orders with suppliers
- Obtaining trade financing in Dubai strengthens the relationship between buyers and sellers, leading to higher profit margins. It also makes the companies more competitive.
- Trade finance helps to resolve the trouble of cash constraints or liquidity gaps for suppliers, customers, third parties, employees or providers.
- Since trade finance is not ‘balance sheet led’, small businesses with weaker balance sheets can avail of trade finance services in Dubai to trade significantly larger volumes of goods
Consult with Providers of Bespoke Corporate Finance Services in Dubai
Trading companies can achieve key benefits such as offering more competitive prices, securing working capital etc. by availing corporate finance services in Dubai, UAE. Jitendra Chartered Accountants (JCA) is a leading corporate finance provider offering bespoke trade finance services in Dubai.
Being one of the top trade finance service providers in Dubai, JCA can help the trading companies to organize & file documents, pitch to the banks, and liaise and negotiate the best possible competitive terms with the banks. JCA’s experience of the UAE marketplace delivers a robust solution no matter how complex the deal is.