Trade finance

Trade finance

Trade finance help to make import export transactions possible for entities, varying from a small business importing goods from overseas, to multinational corporations exporting or importing large amount of consignments around the globe each year.

Trade finance constitutes of instruments and products, which companies use for international trade and commerce to reduce the risks related in International trade transactions. Trade finance brings down the payment risks of importers and exporters by introducing a third-party to business transactions. The exporters get receivables or payments, as per the agreement; on the other hand importers receive credits to fulfill the trade order. 

Usually, exporters consider getting paid upfront by the importer to reduce risks of not getting paid even after the importer takes the shipment. On the other hand, importers paying in advance also have risks of exporter refusing to ship goods after receiving the payment. To resolve this problem, trade finance introduces the Letter of Credit – which the importer’s bank provides to the exporter’s bank. Letter of Credit guarantees that once the issuing bank receives proof that once the exported good is being shipped and the terms of the agreement have been met, it will issue the payment to the exporter.

Benefits of trade finance

One of the major benefits of Trade finance is that it reduces the risks related to international trade finance by introducing a third-party to business transactions. Other key benefits of trade finance include:

Improved cash flow and operational efficiency: Through trade finance companies are enabled to get cash payment based on accounts receivables in case of factoring. The letter of credit in the trade finance reduces the risk of non-payment or non-receipt of goods; thereby increasing cash flow. Furthermore, with fewer delays in payments and shipments, through trade finance exporters and importers can manage their business and plan cash flows more efficiently.

Increase in revenue: The creative financial solutions trade finance provides to the exporters and importers enable the companies to increase and expand their businesses and revenue through international trade.

Reduction in financial hardship risks: Factors in trade finance like revolving credit facilities and accounts receivables factoring help companies in both international transactions and times of difficulties.

Trade finance is majorly important for exporters and importers since it ensures protection against the unique inherent international trade risks – like currency fluctuation, political instability, non-payment issues, credit-worthiness of any party involved in the trade and others.

Trade finance has evolved over the years to deal with financial risks in trade transactions like exporters’ risk of not getting paid even after the importer receives the shipped goods or the exporter refusing shipment of goods even after importer extends the payment of goods in advance. It works as a bridge between the financial gap between exporters and importers; thereby reducing the risk of non-payment or non-shipment of goods. Trade finance also includes various other activities in international trade transactions like issuing letters of credit, lending, forfaiting, export credit and financing, and factoring.

Trade financing is also important for companies as it helps them increase and expand their businesses and revenue through international trade and further benefit in both international transactions and times of difficulties.