Trade finance makes imports and exports much easier for smaller businesses trying to compete with multi-national corporations that export and import a large number of goods on an annual basis.
Many smaller businesses lack the resources they need to reach larger markets, which makes moving gods much more challenging for them. Many small business owners also aren’t offered draft protection by traditional lenders when completing these types of international transactions.
Small business owners fear that they will have their resources tied up for up to 4-to-6 weeks at a time simply trying to do business on an international level. A lot of small businesses can’t afford to have their capital (money) tied up for that long at a time.
This is where trade financing comes in:
How the Process Works:
Various trading entities such as banks and financial institutions assist in the transportation and the delivery of goods from one business to another on an international level. They set up international transactions and facilitate the delivery of them. Trade financing has helped the growth of international purchases and sales skyrocket, while also spurring huge international trade growth.
Trade financing covers a variety of different types of transactions including credit, lending, forfeiting, etc. transactions between importers and exporters. The following are 5 ways that financial transactions can help protect your business:
Trade Finance Reduces Risk: Trade financing came about when exporters and importers tried to cut their nonpayment for goods and tried to preserve their business. The lack of a guarantee of whether someone was going to pay meant that the importers/exporters know that they will be able to ship the goods and keep their business running.
Reduces Pressures on Both Importers/Exporters: Having the right financial tools available can help both the buyer and the seller grow their businesses without the businesses being afraid of taking the risk of not being able to afford to lose the payments that they need to stay in business. If companies are more comfortable taking the risk to grow, they will be able to grow faster and help improve global commerce and supply chains.
Varieties of Trade Products/Services: Some financial institutions will offer things like letters of credit and bank guarantees to help protect both the companies exporting and the companies importing goods as well as the people purchasing the goods. Between these two products, they offer protection for the various likes and dislikes, and needs of both the buyer and seller.
Factoring in Trade Financing: Trade financing allows exporters to help increase the flow of cash into their business. Open invoices are sold to customers who pay for them when they are fulfilled.
Forfaiting: Forfaiting is a type of agreement in which an exporter sells all of their accounts for cash and is able to get rid of any debts that they owe by giving the debt to the forfeiter. The forfaiter is the entity/business that is purchasing the account. The sale is not complete until the forfaiter’s bank guarantees the payment and approves the transaction.
These are just a few ways that trade financing has helped the trade industry accelerate and grow rapidly over the last several decades. For more information on trade financing and how it can help your business, please feel free to contact us for further assistance. We are here to help.