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International Trade Finance: Types, Benefits & How It Works

Oct 27, 2020 - 04:53 PMAuthor - Emerio Banque

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Whether you are running a small or big business, you always look for ways to expand your business’s export and want buyers to import your product first. Here, when trade finance comes into the scenario making it easy to run an international business smoothly around the different corners of the world. But what is financing of foreign trade or International trade and finance and how does it help importers & exporters? Let’s find out:


What Is International Trade Finance?


International trade finance meaning: "The financial activities involved in international trade transactions, such as the import and export of goods and services, are referred to as international trade finance. These financial activities can include a variety of tasks such as financing, risk management, and payment processing." Or

Global trade finance instruments are simply the financial help provided by banks or financial institutions in the field of international trade through various types of financial instruments like bank guarantee, letter of credit etc. These varieties of financial instruments and products helps importer & exporters to execute business transactions without facing any financial inconveniences. It bridges the gap between importers & exporters by adding a third party and covers activities like issuance of letter of credit, lending or forfaiting, etc.


The parties involved are:

International trade finance transactions involve multiple parties, each with their own set of roles and responsibilities. In most international trade finance transactions, the following parties are involved:

1. Importers: The party who buys goods or services from a foreign provider and imports them into their own nation. The importer is in charge of making all arrangements for delivery and shipping as well as payment for the products or services.
2. Exporters: The party who sells goods or services to a foreign customer/buyer/importer and get paid for the goods or services they have provided.
3. Freight forwarders: Specialize in arranging the transportation of goods from one country to another. They can handle all aspects of shipping, including customs clearance, insurance, and documentation.
4. Banks: Banks are key players in transactions involving the financing of international trade. In addition to processing payments and issuing letters of credit, they can offer financing of foreign trade to importers and exporters and offer other financial services that support global trade.
5. Insurance: Insurance companies offer trade credit insurance to shield exporters from the possibility of nonpayment by international clients. Also, they can offer additional insurance to guard against other dangers involved with global trade, like damage to products during shipping.


Providers:


Both imports and exporters need foreign trade finance services to help them cover their business expenses. Apart from banks, various financial institutions offer safe and reliable import & export finance services for their corporate clients.



  • 1. Financial Institutions: Many financial institutions specialize in handling different financial products for their corporate clients including investments, Bank Guarantee, loans, Letter of credit, deposits, and more. The financial institutions with a legal operating license provides advanced funds to corporations that require funding for their ongoing business deals.


  • 2. Financial Intermediaries - Apart from above financial institutions, there are many Financial intermediaries like agents and parties that work with financial corporates and help you in your international trade transactions. It includes insurance brokers who can help you find insurance providers.


  • 3. Traditional Commercial Banks - Both small and larger, domestic or multinational banks like Emerio Banque offer various kinds of international trade finance services to corporates from across the world.


Users:


International trade finance is quite a large industry and covers many sectors. The users of foreign trade finance are:



  • * Importer

  • * Exporter

  • * Manufacturer

  • * Trader

  • * Producers


How Does It Work?


The process of financing international trade includes various trading intermediaries such as banks, and other financial institutions to facilitate different financial transactions between importer and exporter. They act as third parties and remove the payment & supply risks between buyer and seller. The exporter gets the receivables or payment as per the agreement while the importer can extend credit to complete the trade order.


International trade financing covers a vast range of different types of trade finance products including Letters of Credit, bank guarantee, lending, forfaiting, export credit, and factoring.


Types of International Trade Finance


The nature and purpose of Global trade finance instruments is completely different from conventional financing or credit issuance. General financing international trade is widely used to manage solvency or liquidity but financing foreign trade can be used to protect both buyers and sellers from global trade’s risks.


Here are some of the main types of trade finance instruments, Let’s find out:


  • 1. Letter of Credit - In foreign trade finance, a letter of credit is a proof of funds issued by any bank or financial institution on the behalf of the buyers, guaranteeing that the sellers will get the full payment in exchange for their delivered good & services on-time. But in case if the buyers are unable to do so, the bank will pay to the seller in part or full according to the terms and conditions of issued letter of credit. Here are some of the most commonly asked questions and answers on letters of credit:


  • 2. Bank Guarantee - It is also issued by a bank where it acts as a guarantor in case the importer or exporter is unable to fulfill the terms and conditions of the contract. Checkout Faq's on Bank Guarantee here! 


  • 3. Factoring - When the companies are paid on the base of the percentage of their accounts receivables. The exporter sells their invoices to the trade financier at a discounted rate. Then the factor sells it to the importer and gets the full price for the product.


  • 4. Export Credit - This can be delivered to exporters as trade business working capital. Once the amount is received from the buyer, the export packing credit amount can be adjusted, and then the loan will be closed against the order.


  • 5. Forfaiting - Here, the exporter sells all of their accounts to a forfaiter at a discounted rate in an exchange for the cash.


  • 6. Insurance - You can use for shipping and the delivery of goods as well as to protect the exporter from non-payment by the buyer.




How Does It Help In My Business?


Global trade finance instruments can help reduce the risks involved in international trade by bridging the gap between buyers and sellers and securing funds required to purchase the goods etc. There is no doubt that an exporter needs an importer to pay in advance for an export shipment to avoid the risks of nonpayment or refuse to pay for the goods. The appropriate solution to this problem is to provide a proof of funds to the exporter’s bank presenting the documents of the shipment. It guarantees the full payment to the seller in case the buyer fails to do so.


Other Benefits of International Trade Finance:



  • * It helps different companies to obtain funds to facilitate their international transactions smoothly. The companies can receive cash payments based on the accounts receivables in case of factoring or they can also consider letters of credit.


  • * Companies can improve or grow their global business and generate revenue through trade.


  • * It helps companies reduce the risks of financial nonpayment.


  • * It also strengthens the relationship between buyers and sellers.


  • * Buyers can request a higher volume of stock or place larger orders with the suppliers.


Disclaimer

Emerio Banque is an innovative global financial institution incorporated in England and Wales with Legal Entity Identifier 875500DGPPWAFABBK130. Emerio Banque does not offer its products and services to businesses and/or persons registered in the United Kingdom.

No information on this website should be construed as a solicitation, offer, recommendation, and representation of suitability or endorsement of any security, investment or strategy.

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