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During the beginning of global trade, many importers didn’t know whether their orders were shipped and when, and exporters were never sure if and how their goods would be paid for by the importer. This significantly slowed down international trade and came with numerous risks companies simply weren’t willing to take. In turn, trade finance appeared as the ideal solution for streamlining the importing and exporting processes. Whether you deal in global trade or you simply want to know more about this financial option, here is a detailed beginner’s guide to trade finance that will provide you with all the necessary answers:
What is trade finance?
Trade finance aims to address the risks of international trade by speeding up payments made to exporters and guaranteeing to importers that all ordered items have actually been shipped. The importer’s financial provider also offers the exporter a letter of credit as payment after the necessary documents have been presented. Similarly, the exporter’s financial institution could also provide them with a business loan while processing the importer’s payments instead of allowing them to wait until it goes through. The loan is then recovered when importer’s payments are received.
How does it work?
Trading intermediaries, mainly banks and similar financial institutions, facilitate and oversee different types of financial transactions between importers (buyers) and exporters (sellers). These institutions can step in when necessary to finance transactions between importers and exporters, whether they happen internationally or domestically. As such, trade finance enables streamlined operations and prevents any financial disruptions in the importing and exporting process. This solution has proved to be quite beneficial and has led to immense growth in global trade ever since its appearance.
Benefits of trade finance
With the right trade finance solution, your company can enjoy a number of benefits. You can pay both local and global suppliers without any cash flow issues, and thus empower your business to expand internationally. By being able to set your own trading terms, trade finance can also empower you to close your working capital gap while giving you the flexibility to diversify your funding options as well. Above all, you will have the opportunity to choose the best possible partners for your business and thus accelerate growth, without allowing payment terms to keep you from conducting business.
Different types of products
Financial institutions will provide different types of services and products to fit the unique needs of different companies and various transaction forms. The two most common trade finance products include letters of credit and bank guarantees. A letter of credit represents a promise from the buyer’s bank to the seller saying that they will immediately make the necessary payment once the seller presents the required shipping documents. Within a bank guarantee, a bank will act as a guarantor if the buyer or seller doesn’t fulfil contract terms, paying a specific sum of money to beneficiaries. These two financial products can be accommodated to different circumstances as well.
Providers of trade finance
When trading internationally, trade finance solutions can be found with a number of different providers. In most cases, that will be a traditional bank or a different form of financial provider, likely specializing in trade finance. However, these options can be provided by more unconventional financiers as well, including syndicates, trade finance houses, etc. The type of solution you select will depend on the unique needs of your company, the requirements of the transaction, as well as the terms of the trade finance option that suit you the most.
Evidently, trade finance comes with a number of advantages for any business. If you deal in importing and exporting, consider this financial solution to reduce risks and improve operations.
