Trade Financing Options & Practices in Singapore
Letter of Credit is the common practice in Singapore where payment to the exporter is guaranteed by the buyer’s bank, this is the preferred payment option both among exporters as well as buyers because the exporter’s payment is secured before the goods are shipped and likewise the buyer need not pay until the goods are received. Based on the LC other financing options are also available namely Back To Back LC, Trust Receipt and Packing Credit.
In a scenario where an exporter has to procure goods from another third party to fulfill the buyer’s order, the exporter may open an LC with his bank based on the Original LC of the buyer. This type of LC, which is based on another LC, is called Back To Back LC. Trust Receipt is a loan obtained on an LC, to procure the Goods for which the LC was opened. Packing Credit is a loan or overdraft privilege based on an LC, it can either be a pre-shipment or Post Shipment financing- in the former repayment is done after shipment, in the latter case repayment is done after the buyer makes the payment. Apart from LC and LC based trade financing, the other options for traders are • Overdraft – Businesses are very familiar with this form of credit, a trader can overdraw from his current account unto a limit agreed with the bank. Interest is charged only on the amount overdrawn. • Transaction Loan – To buy materials to fulfill a confirmed order, traders can obtain loans against the confirmed order, depending on the creditworthiness of the company that placed the order. • Term Loan – loan obtained against collateral. Creditworthiness, business performance and cash flow are other factors that influence the banks decision in granting the loan • Factoring Loans – Factoring agents like banks and financial institutions provide instant payment against outstanding invoices of the trader. A fee of up to 15% is charged for collecting the payment from the clients. However it depends on the creditworthiness of your clients. • Inventory Financing – Loans obtained against unsold inventories • Revolving Credit Arrangement – Trader can draw from the funds set aside by the bank for a fee and top it up regularly.
With the launch of LIS 3, on 1 August 2007 new applications for trade financing facilities (such as working capital lines and factoring facilities), which were previously funded under the Local Enterprise Finance Scheme (LEFS), will now be funded solely under LIS 3. Loans offered under LIS 3 are partially insured against the borrowers' default risks, with the government sponsoring 50% of the premium cost. An insurance premium of 1.5% per annum computed based on the total loan amount approved, will be imposed for all types of loan facilities granted under LIS 3. SPRING Singapore and IE Singapore jointly co-share the insurance premium with the companies.
IE Singapore launched Internationalization Finance Scheme (IF Scheme), which is designed to help Singapore-based companies support their expansion overseas. Qualifying exporters can apply for loans available under the Scheme to fund overseas sales orders. IE co-shares their default risks with the participating financial institutions (PFI). Upto 90% of the sales order value or contract value can be obtained in the form of structured loans up to a maximum period of 3 years. Collateral requirement and interest will be determined by the PFI. The maximum loan extended to the company on a group basis shall not exceed S$15 million.
Trade Insurance Options in Singapore
In order to enable Singapore exporters to offer competitive credit terms to the customers and to enhance their access to credit insured accounts receivable, Trade Credit Insurance Programme was launched by the International Enterprises. This TCI programme is a risk management insurance to Singapore based companies at attractive premium rates which is otherwise available only to companies with significant trade volumes. The TCI insures exporters’ accounts receivable against non-payment, whereby they can receive payment from the insurers when buyers default due to bankruptcy, extended default etc. Under TCI programme the underwriters provide attractive premium rates of up to just 0.35% for average risk accounts. Other than this there are underwriters who provide Export Credit Insurance to exporters. Such insurances insure the goods against damage, theft and loss and also protect the exporter against non-payment by the buyer.
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