Types of trade finance options UAE businesses must be aware of

Trade finance is the financial instrument technique that is applied by business organizations for business and trading. It includes the financial instruments which the financial institutions use to do business transactions on a day-to-day basis.

Businesses that trade internationally find it critical to avail themselves of accounting services in Dubai to help mitigate the key risks involved. Even if you have a confirmed order for products, banks may still be reluctant to provide a loan for such types of transactions. Businesses in such a situation take help from trade finance companies in Dubai.

Let’s have a look at the list of various types of trade finance facilities trader's options to meet their business requirement.

Letter of Credit

Bank issue a documentary letter of credit to traders as an irrevocable undertaking, which is deemed the most secure banking instrument available for businesses. In an LC arrangement, banks agree to pay the beneficiary provided all the documents are provided all the documents are provided and the trader complies with all the terms and conditions. 

Trust Receipts are not defined under UAE law. In practice trust receipts are receipts issued by the owner of the goods permitting another party to deal with the goods on behalf of the owner. Trust receipt facilities are commonly used in the UAE as documentary credit financing. 

Banks and financial institutions issue letters of credit on behalf of their customers in order for the customers to avail their goods purchased (financed by such letters of credit) and enter into a trust receipt arrangement so that the goods may be released to the customer for sale in the local markets. The trust receipt ensures that the bank retains its title in the goods while releasing the right to deal in the goods to the customer.

It represents a more significant contractual obligation for banks than letters of credit do. A bank guarantee, like a letter of credit, guarantees a sum of money to a beneficiary. The bank only pays that amount if the opposing party does not fulfill the obligations outlined by the contract. The guarantee can be used to essentially insure a buyer or seller from loss or damage due to nonperformance by the other party in a contract.

A bank account overdraft happens when an individual’s bank account balance goes down to below zero, resulting in a negative balance. It usually happens when there are no more funds in the account in question, but an outstanding transaction is processed through the account, leading to the account holder incurring a debt.

Bookkeeping services in Dubai 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.