5 Things You Need to Know About Trade Finance

In international trade, the buyer will always prefer to wait until goods arrive before making any payment. Sellers, on the other hand, will always want to receive payment right away every time a deal is made. International trading can sometimes get really complicated, especially when it comes to payment.

The risk involved in international trading has brought lots of concerns. It makes sense why international financial institutions have deemed it necessary to come up with the revolutionary idea of offering trade finance products. Trade financing provides credits that are needed to finance both foreign and domestic transactions without any hassle.

trade finance

Below are the five things every business owner needs to know about trade finance.

1. There’s 100% Flexibility In Trade Financing

The flexibility of trade finance is attributed to how it allows entrepreneurs to enjoy a certain time period to source for enough funds before settling their balance. International financial institutions provide a credit facility, helping you pay for all the goods you’ve purchased from your suppliers from any part of the world. The way trade financing works is truly highly beneficial. 

The flexibility of financial institutions offering trade finance products to provide upfront payment in your seller’s local currency is another notable benefit. It saves you from hassles that currency exchange risks may bring.

Trade finance also helps businesses experience a more stable cash flow, allowing them to buy goods in larger quantities than they previously used to do.

2. Trade Finance Has Various Products And Services

Financial institutions, such as banks, offer different trade finance products and services. It helps ensure that there’s a trade financing option that fits different types of transactions and companies.

Two of the most popular products and services are bank guarantee and letter of credit. With a bank guarantee, a banking institution acts as a guarantor if the exporter or importer fails to fulfill the contract’s terms and conditions. The bank will take the initiative to pay the beneficiary. A letter of credit, on the other hand, is a promise that the importer’s bank undertakes to the exporter. It says that once the seller successfully presents the different shipping documents that the purchase agreement from the importer has spelled out, the bank will immediately pay the exporter.

It’s essential to note that bank guarantee and letter of credit may have different variations to ensure that various types of circumstances and transactions are accommodated.

3. Trade Financing Doesn’t Require Assets As Security

Your chances of getting the funds from the financial institution that offers trade finance aren’t based on your financial history. Trade finance is solely based on your next business deal. As long as you have a business transaction in place, you can fund it. Simply saying, you don’t have to offer any asset as security, and you don’t need to maintain a certain credit score or record level.

If you’re purchasing supplies you need, or if you got a viable purchase order, you could take advantage of trade financing to get things moving. It makes it possible for international entrepreneurs to complete a transaction even without cash in their accounts.

Also, having one trade financing agreement in place won’t decrease anyone’s chances of getting funds for further deals. Unlike debt financing, most trade finance providers are happy and willing to provide funds if you have orders.

4. Trade Finance Offers Guaranteed Security

If you want to give your sellers the peace of mind and courage in every transaction you make with them; trade finance is your best bet. Trade financing allows you to offer suppliers an undertaking of payment straight from your financial provider. It won’t only make them realize that maximum security is assured, but also improve business relationships.

5. You Aren’t Paying For Any Funds You Don’t Need

Each trade financing transaction covers a specific export or import order. The coverage is up to the last cent–no less, no more. Since you’re only going to set up trade finance when you have an order to fund, you’ll never pay for funds you don’t need.

As already mentioned, trade financing is smart and flexible. You aren’t tied into any long-term deal. You can simply use trade finance when you need it. However, you can always seek more money to fund more transactions.

Final Thoughts

Trade financing enables business owners to enjoy alternative ways of financing their purchases in a safer, more convenient, and flexible manner. Its primary goal is to allow domestic traders, exporters, and importers to come to terms with all the realities surrounding the business environment.

With trade financing, sellers and buyers don’t have to worry about getting goods in good quality and getting paid on time. It makes importing and exporting of goods more straightforward and secure. Financial providers will take care of everything. Trade finance is, no doubt, something that those who want to succeed in the international business arena should adopt. 

About Mohit Tater

Mohit is the co-founder and editor of Entrepreneurship Life, a place where entrepreneurs, start-ups, and business owners can find wide ranging information, advice, resources, and tools for starting, running, and growing their businesses.

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