Trade Finance for Dummies

by | Nov 9, 2020 | Articles

BENEFITS OF GLOBAL TRADE AND RECEIVABLE FINANCE

The global exchange between businesses in different countries across continents is aided by a financial product called trade finance.  In fact according to the World Trade Organisation, 80-90% of world trade depends on trade and receivable finance in enabling importers and exporters to reduce the level of risk involved in international trade transactions which can be enormous for businesses to bear alone.

WHAT IS TRADE FINANCE?

Trade finance is financial instrument that promotes international commerce by removing the payment and supply risk involved in global trade transactions.

Institutions involved in a trade finance include: Insurance companies, banks, trade finance companies and export credit agencies.

TYPES OF TRADE FINANCE

A trade finance instrument can be in any of the following forms:

  • Working capital loans: This is also called a business loan, manufacturing companies benefit from this financial instrument by using these funds to purchase the required raw materials, and to cover the operational and labour cost needed to start. This form of loan can be secured with a business asset or unsecured depending on the lending financial institution and their belief in the business’ potential.
  • Advance payment: This is a pre-export financial requirement for some export and import trade transactions. Sellers or exporters request a part or full payment of the cost of their products before delivering to a buyer/importer. This method is often utilized by exporters with financial restraints.
  • Factoring: It is a post-export financial instrument based on what is called receivables or invoices. A financial institution purchases a business invoice from a supplier or seller at a discounted rate. Thereafter, the buyer pays for the invoice through the financial institution after receiving the deliverables.
  • Overdrafts: This is a bank approved extension of credit granted to businesses at a specific interest rate. This allows these businesses to withdraw funds more than the amount available in their bank account.

TRADE FINANCE BENEFITS

  • Availability of funds to carry out business processes: Manufacturing companies or businesses leverage on trade finance services like bank loans to fund key manufacturing processes that are critical to their business growth.
  • Steady supply of funds: Businesses can use Factoring to obtain quick supply of funds without waiting for a seller to pay for their products.
  • Risk reduction: Importers and exporters can be reassured that they will receive their products and get paid respectively by partnering with trade finance agencies to authenticate the process.

Trade finance agencies and other financial institutions protect the interests of importers and exporters in global trade transactions.

 Businesses often benefit from trade finance services because of the efficiency and continuous inflow of funds it provides for smooth business operation.