What Is International Trade Finance? How Does It Work And Types
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 trade finance and how does it help importers & exporters? Let’s find out:
What Is International Trade Finance?
Trade finance is 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:
- 1. Importers and exporters
- 2. Banks
- 3. Trade financial institutions
- 4. Insurers etc.
Both imports and exporters need 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, loans, 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.
Trade finance is quite a large industry and covers many sectors. The users of trade finance are:
- * Importer
- * Exporter
- * Manufacturer
- * Trader
- * Producers
How Does It Work?
The process of trade finance 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.
Trade finance covers a vast range of different types of activities including Letters of Credit, lending, forfaiting, export credit, and factoring.
Types Of International Trade Finance
The nature and purpose of trade finance are completely different from conventional financing or credit issuance. General financing is widely used to manage solvency or liquidity but trade financing 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 - 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.
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.
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 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?
Trade finance 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.