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What is Trade Finance

Trade Finance Overview

Trade finance refers to a range of tools, techniques, and instruments designed to facilitate trade by protecting both buyers and sellers from trade-related risks. It helps reduce the risks involved in global trade for both parties, ensuring smooth transactions.

How Trade Finance Works

In any trade transaction, both buyers and sellers are exposed to risks:

Buyers risk that the goods will not arrive on time or will not meet the expected quality or volume.
Sellers risk non-payment after delivering the goods.

These risks are heightened in international trade due to differences in cultures and regulatory climates. To mitigate these risks, various trade finance methods can be used, such as payment in advance and letters of credit (LCs).

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Payment in Advance

In this method, the buyer pays the supplier before receiving the goods. While this protects the supplier from non-payment, it does not protect the buyer from risks such as late delivery or receiving unsatisfactory goods.

Payment in Advance: Buyer pays supplier before goods are delivered.

Supplier Protection: Ensures supplier receives payment.

Buyer Risk: No protection against late delivery or unsatisfactory goods.

Revolving Letter of Credit

Covers multiple transactions over a period of time.

Standby Letter of Credit

Assures payment to the seller if the buyer fails to pay, though it is not expected to be used.

Back-to-Back Letter of Credit

Connects the buyer and seller via an intermediary with two LCs.

Sight or Documentary Letter of Credit

Payment is made immediately after the documents are reviewed by the bank.

Letters of Credit (LCs)

An LC is a trade finance instrument, often used in high-risk international transactions, governed by the International Chamber of Commerce's Uniform Customs and Practice for Documentary Credits (UCP 600). In an LC transaction:

The buyer’s bank guarantees payment to the seller if all documentary conditions (e.g., bills of lading, insurance certificates) are met.
This mitigates risks for both parties:
- The seller is assured payment if conditions are met.
- The buyer is protected by the need for proof of delivery.

While LCs offer risk protection, they can be costly and involve significant paperwork, causing delays.

Trade Finance Gap

There is a global trade finance gap of approximately $1.5 trillion, with smaller businesses facing the greatest challenges in accessing trade finance. Technologies like blockchain and supply chain finance are expected to play a crucial role in addressing these gaps in the future.

Trade finance offers the following key benefits:

Mitigates risks such as non-payment.

Provides sellers with short-term finance to improve cash flow.

Supports international trade and business growth.

Example of Trade Finance

A trading company purchases 150,000 metric tons of sugar at USD $500 per metric ton, delivered over 12 months (12,500 metric tons per month).

Monthly Invoice:
12,500 tons × $500 = $6,250,000

The purchaser seeks 30-day credit to sell the sugar before paying the supplier. However, the supplier requires immediate payment.

Our Trade Finance Partner steps in by advancing the buyer 50% of the total cost, with the buyer paying the remaining 50%. The buyer then sells the sugar at a 100-200% markup.

Scenario Breakdown:

Go Asset Finance Advance: $3,125,000 (50%)
Buyer Contribution: $3,125,000 (50%)
Total Payment to Seller: $6,250,000

The buyer must repay 100% of the borrowed amount ($3,125,000) plus a 7.5% premium ($234,375) within 30 days.

Monthly Profit for Go Asset Finance: $234,375
Annual Profit for Go Asset Finance:
$234,375 × 12 = $2,812,500

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Return on Capital

Capital Advanced: $3,125,000 (for 30 days)
Total Annual Return: $2,812,500
Return on Capital (annualized): 90%

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After deducting a 25% management charge to our Trade Finance Partner, this results in a net annual return of 67.5% on funds deployed by Go Asset Finance Ltd.

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This structure allows Go Asset Finance to generate significant monthly profits while minimizing exposure.

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Disclaimer & Risk Warning:

‍The information on this website is directed exclusively at certified or self-certified sophisticated investors, certified high net worth individuals, and investment professionals. Investments are high risk and may be illiquid. Your capital is at risk, and returns are not guaranteed. These investments are not protected by the Financial Services Compensation Scheme (FSCS) and are not regulated by the Financial Conduct Authority (FCA). If unsure, seek independent financial advice.

Disclaimer:

The information on this website is directed exclusively at certified or self-certified sophisticated investors, certified high net worth individuals, and investment professionals. You can find the definitions of these investor categories below.

Risk Warning:

These investments carry a high degree of risk and may be illiquid. Your capital is at risk, and returns are not guaranteed. Investments are not covered by the Financial Services Compensation Scheme (FSCS) and are not regulated by the Financial Conduct Authority (FCA). Therefore, you may not have access to the Financial Ombudsman Service (FOS) for complaints.

If you are uncertain about your investor classification or are unsure about investing in our offerings, we strongly recommend consulting a professional advisor specializing in investments of this nature.

The content on this website is provided for informational purposes only. It should not be construed as legal, tax, investment, financial, or any other form of advice.

We recommend that investors seek independent advice before making any investment decisions.

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Investor Definitions:

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To qualify as a self-certified sophisticated investor, you must confirm that at least one of the following applies to you:

You have been a member of a business angel network or syndicate for at least six months.
You have made multiple investments in unlisted companies in the past two years.
You have worked professionally in the private equity sector or in the financing of small or medium-sized businesses in the last two years.
You are, or have been within the last two years, a director of a company with an annual turnover exceeding £1.6 million

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You have had an annual income of £100,000 or more (excluding one-off pension withdrawals).
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