How Does International Trade Financing Work?
When operating a small or medium-sized business, it’s common to have limited access to loans or financing. Most banks will not provide funding if your business has a short operating history or weak financials. If you are faced with this issue, an international trade finance company can help.
Understanding the Basics of International Trade Financing
In trading transactions, buyers do not want their money tied to a shipment of goods that could take several weeks to arrive from a manufacturer overseas. On the other hand, exporters that send out large quantities of goods cannot afford to wait until their shipment arrives before they receive their payment. That is why more than 80% of all global trade depends on an international trade finance company for assistance.
Financial institutions that offer trade financing act as intermediaries between importers and exporters and provide financial assistance for business transactions between the two parties. These transactions may take place either domestically or internationally.
Trade finance companies take care of various activities during the importing and exporting process. These activities can include issuing a letter of credit and factoring. The process involves multiple parties, including the importer and exporter, the trade financer, the exporting credit agencies, and any involved insurers.
Factoring in trade finance is a standard method used by exporters to increase their cash flow speed. With this agreement, the exporter offers their open invoices to a trade financer at a discount price. The trade financer, or factor, purchases the receivables, provides cash upfront to the exporter, and collects payment from the importer at invoice maturity. Factoring helps eliminate the risk of potential bad debts for the exporter. It also provides them with working capital they can use to keep business running smoothly instead of waiting around for payment.
Trade Finance Helps Minimize Risk
Trade financing plays a significant role in making sure shipments are transported and paid for within a reasonable amount of time.
Without a trade finance company’s assistance, exporters may never know whether or when an importer will pay them for their purchased goods. At the same time, importers also have doubts about buying a product when they have no guarantee if the seller will ship out their goods.
Trade finance services help eliminate those risks by increasing the speed of payments to exporters and guaranteeing all goods are shipped out to importers. Companies that provide non-recourse financing will still pay their clients if the buyer defaults due to buyer insolvency.
Take Advantage of the Various Trade Finance Products and Services Available
Trade finance companies offer various products and services that meet the needs of the different companies they assist. Two popular extras offered include a Letter of Credit and a Bank Guarantee.
- Letter of Credit - A letter of credit is a promise made by the importer’s financial institution to the exporter. The letter states once the exporter shows all documents from the shipment as required by the term in the contract, the financial institution immediately makes the exporter’s payment.
- Bank Guarantee - The bank guarantees a sum of money to the beneficiary if the exporter or importer fails to meet the contract’s terms. This guarantee helps provide peace of mind to the buyer and seller when taking part in an international trade transaction.
There are many different variations of these two products, allowing them to be used with various types of transactions and scenarios.