Any international business selling goods understands the importance of cash flow. Without strong cash flow, growth stagnates, and competition fills the demand void left behind. Unless your organization has limitless access to cash reserves, liquidity must be provided by an outside source.
Growing companies often look first to bank loans or letters of credit. While each of these financial tools has its time and place within an organization, financing purchase orders with either method has its limitations. There are other solutions available, however, that can meet the unique challenges associated with international sales and can be leveraged by partnering with international trade finance companies like Tradewind.
The Challenges of Growth
Managing a growing organization is both exhilarating and stressful. During the journey of countless successful companies comes a time when meeting demand is in jeopardy.
For businesses across several industries, such as durable goods, month-over-month order volume can accelerate at an increasingly exponential rate, while other organizations, especially brand-focused companies, could receive a single order larger than the total of all prior sales.
Regardless of the reason, the orders need to be filled. But therein lies the problem. Growing businesses face two challenges related to cash flow:
- Meeting the supplier’s payment terms
- Waiting for payment from the customer
The gap between when your supplier ships your goods to when your customer makes a payment could be two months – or longer. The complexities of international trade only compound the cash flow challenge. Fortunately, where traditional financing options fall short, trade finance offers a comprehensive solution to help companies grow.
How Trade Finance Works
Once the buyer confirms a purchase order, an international trade finance company provides the funds to pay the supplier immediately. The payment is handled directly between the supplier and the trade finance company, who purchases the supplier’s receivables at a discount and advances cash to them. The cash amount is equal to the majority of the invoice value. The benefit of quick payment means the supplier can ship the goods without delay.
The trade finance company monitors the logistics of the shipment. Upon invoice maturity, the buyer will pay the trade finance company, according to pre-established payment terms. The balance of the invoice, minus the international trade finance company fees, is sent to the supplier after the buyer has met agreed upon payment terms.
Reduction of Risk
The benefits of partnering with an international trade finance company go beyond providing much-needed cash. For any organization participating in international trade, there are certain risks that are absent when trading domestically.
Trade finance can help mitigate the following global risks associated with global trade:
- Country Risk – There are numerous crises which can erupt in either the supplier’s or the customer’s country. Civil unrest, terrorism, or financial collapse are potential threats to completing an international sales transaction. Unlike traditional funding options, such as banks, international trade finance companies absorb this risk.
- Currency Risk – There can be a substantial time delay between when money is exchanged. This gap introduces exchange rate risk as usually you, the supplier, and the customer operates in their country’s currency. Using trade finance, the risk is taken on entirely by the trade finance company. Financial organizations like Tradewind offer trade finance facilities in multiple currencies, eliminating upfront all risk resulting from currency exchange.
- Commercial Risk – While a bank loan may use real property as collateral, trade finance companies must rely on the creditworthiness of the supplier or the customer, depending on what type of financing you arrange for. This vetting process protects you from insolvency or default by one of your trade partners.
Utilizing the services of an international trade finance company can combine the financial tools needed for growth with risk mitigation. The added security provided by international trade finance companies could prevent potentially devastating blows to cash flow if your organization took on such risks.
One of the invaluable services provided by international trade finance companies is the overseeing of your entire transaction. Since trade finance companies have a vested interest in fulfilling the transaction promptly, your organization can benefit from the access to important logistical information they provide.
Not only is the movement of physical goods closely monitored, but so too is the flow of money between each party. Both pieces of information can be leveraged to position your organization for continued growth.
By knowing exactly when your goods will be delivered and funds deposited, your business can begin preparing the next purchase order before the current transaction is completed. The ability to constantly work ahead and toward the future is an asset to any organization competing in today’s global economy where speed often wins out.
Financing Your International Sales
Access to liquid capital is the foundation from which successful companies grow their business. Choosing the right vehicle to finance your company’s capital needs can be an important factor in determining just how successful your company can become. If you’re looking for additional liquidity to help your business grow, it’s worth exploring international trade finance companies like Tradewind for your financing needs.