Corporate Finance
Corporate finance is a complex and multifaceted field within finance. Its primary objective is to maximize shareholder value, but it also involves critical decisions related to investments, dividends, and financial planning. With the right application of knowledge and strategic planning, a company can effectively manage its available funds while preparing budgets and financial plans for the future.
There are various sources of corporate finance, including shares, debentures, public deposits, commercial banks, indigenous banks, retained earnings, and special financial institutions. When a company gives proper attention to its financial management, it significantly increases its chances of achieving long-term success.
The Role of Corporate Finance Assistance in Growing Your Business
1. Evaluate Hurdle Rates
Corporate finance allows for the comparison of various projects based on their risk-adjusted return thresholds. It helps identify the most suitable course of action for each project, maximizing potential within their respective constraints.
2. Enable Informed Decision-Making
It empowers businesses to make sound financial decisions. Once a strategy is selected, corporate finance ensures appropriate control measures are in place to support business growth and stability.
3. Develop a Financial Strategy
Corporate finance plays a crucial role in crafting a financial strategy aligned with organizational goals and parameters, ultimately aiming to maximize profitability and long-term success.
4. Strengthen Stakeholder Relationships
It fosters healthy communication and alignment between management and shareholders, ensuring transparency and reducing the risk of conflict.
5. Forecast and Plan for the Future
Corporate finance helps identify corrective actions and strategic plans, serving as a roadmap for future growth and helping businesses stay on track with long-term objectives.
6. Optimize Tax Efficiency
By maintaining clear and accurate financial records, corporate finance identifies opportunities for tax savings, contributing to improved cash flow and business expansion.
Trade Finance
Trade Finance refers to the financial support provided for trading activities, both domestically and internationally, through a range of financial products. Simply put, it is the funding and services offered to facilitate trade transactions. Trade finance is typically extended by banks or financial institutions.
Types of Trade Finance Instruments:
Working Capital Facility / Loan
Term Loans
Letter of Credit
Receivable Discounting (Invoice Factoring / Invoice Discounting / Cheque Discounting)
Bonds or Guarantees
Trade Finance Options Offered by Earnest
At Earnest, we bring hands-on experience in delivering expert trade finance advisory services to help businesses access the right financial solutions for their trading needs.
1. Working Capital
Working capital is the difference between a company’s current assets (cash, inventory, accounts receivable) and current liabilities (accounts payable, short-term borrowings, accrued liabilities).
Analyzing the operational cycle—from procuring raw materials to collecting payments from customers and settling supplier dues—is essential. The number of days in this conversion cycle is a critical metric for assessing working capital needs. Based on this analysis, our finance experts can identify working capital gaps and recommend funding solutions to bridge them effectively.
2. Term Loans
Term loans are bank advances that must be repaid over a defined period in scheduled installments. These loans may carry a fixed or variable interest rate and are typically used for acquiring fixed assets.
Term loans are categorized by duration into:
Short-Term Loans
Intermediate-Term Loans
Long-Term Loans
Collateral may be required to secure the loan and mitigate the lender’s risk. Earnest can assist in identifying and securing the most suitable term loan based on your business objectives.
3. Letter of Credit (LC)
A Letter of Credit, also known as Documentary Credit, is an irrevocable commitment issued by a bank guaranteeing payment to a seller, provided the terms and conditions outlined in the LC are met and the required documents are presented.
In international trade, LCs are widely used to mitigate risks arising from distance, unfamiliarity, and trust issues between buyers and sellers. If the buyer fails to make the payment, the bank steps in to fulfill the obligation, ensuring the seller receives the agreed amount.
Benefits of a Letter of Credit
For the Buyer:
Non-Fund-Based Facility:
A Letter of Credit (LC) does not require immediate cash outflow, making it a non-fund-based financing option.Interest-Free Financing:
Since no funds are drawn at the time of issuance, it serves as an interest-free way to ensure payment security.
For the Seller:
Reduced Credit Risk:
The seller is assured of payment from the buyer’s bank, significantly minimizing the risk of non-payment.Access to Pre-Shipment Finance:
Sellers can avail financing against the LC before shipping goods, aiding in smoother operations.Timely Receipt of Funds:
Upon compliance with LC terms, payment is received promptly, ensuring healthy cash flow.
Receivable Discounting
1. Invoice Discounting
Invoice discounting enables businesses to access immediate funds by presenting customer invoices to the bank. A portion of the invoice value is disbursed upfront, while the remainder is released once the customer makes the payment. This improves working capital and enhances cash flow.
This facility is typically client-specific and governed by the bank’s internal policies. Banks evaluate factors such as customer payment history, the credibility of the borrower, and collateral before approving invoice discounting.
2. Cheque Discounting
Cheque discounting allows businesses to receive immediate funds against post-dated cheques (PDCs) issued by customers. The bank provides advance payment before the cheque’s maturity date.
This arrangement benefits the supplier with faster access to funds, while the customer retains the agreed credit period for final payment.
Bonds or Guarantees
Bonds or guarantees are financial instruments issued by banks to protect the buyer in case the seller fails to fulfill contractual obligations. If the seller defaults, the buyer is compensated by the issuing bank.
These instruments are commonly used in industries such as construction and project-based businesses. They are categorized as either on-demand or conditional, depending on the claim terms.
Common Types Include:
Tender Bond
Performance Bond
Advance Payment Bond
Retention Bond
Payment Guarantee
Each bond or guarantee type serves a unique purpose in safeguarding financial interests and ensuring contract compliance.
How Trade Finance Supports Business Growth?
Trade finance plays a crucial role in fueling the growth of trading businesses by providing essential financial support from banks and financial institutions. It is particularly beneficial for companies facing challenges related to cash flow or insufficient working capital required for day-to-day operations.
By easing liquidity pressures, trade finance offers relief from common financial constraints such as delayed customer payments, extended credit terms, and funds locked in unsold inventory.
One of the key advantages of trade finance is that it enables businesses to offer more competitive pricing and favorable terms to both suppliers and customers. It assures timely payments to suppliers based on pre-agreed conditions, fostering trust and smoother transactions.
Additionally, trade finance bridges cash flow gaps by providing access to funding options such as term loans, overdraft facilities, and invoice discounting. These tools empower businesses to purchase inventory in bulk, unlocking cost-saving opportunities through volume-based discounts and stronger negotiation leverage—ultimately leading to increased profitability.
Moreover, by minimizing payment risks, trade finance strengthens relationships with suppliers and customers alike, contributing to long-term business stability and credibility.