Trade finance is an umbrella term that covers many different areas of business finance. From covering things like imports and exports to insuring both goods and services, trade finance products can be a hugely useful tool for businesses who trade internationally when looking to expand or protect themselves against any unforeseen circumstances.
Different elements make up trade finance, some people view it, on the whole, more like a science and others more like an imprecise term that covers many activities. Both of these ways of looking at trade finance are true and whilst the financial products on offer are highly specific and tailored to business, the term itself and what falls under it is a little more open to debate.
At its core, trade finance relates to the relative wants of importers and exporters. Although they rely on each other, they both want different terms when it comes to financing.
An exporter typically requires the importer to prepay for their goods. Naturally, the importer wants to reduce the level of risk by requiring documentation that goods have shipped. Lenders and banks can then provide a letter of credit to the exporter or their bank guaranteeing payment upon receiving specific documents (like a bill of lading). The exporter’s lender then may sanction a loan based on the contract and invoice, preventing cashflow problems and allowing the exporter to continue operating in the event of unforeseen delays or issues.
What is International Trade Finance and Why Do Businesses Need It?
Businesses who operate across borders need access to specialist financial products due to the very unique circumstances in which they operate. For example, goods can be held up during transit or customs checks. This can have knock-on effects that delay payments and cause the exporter cash flow problems.
Another situation in which trade finance becomes useful is when the exporter is shipping goods to a country with an unstable political situation, poor legal system or sovereign risk. Having access to these financial packages mitigates many of the risks and allows companies to build international relationships with confidence.
What Types of Trade Finance Are Available?
As we’ve covered, trade finance is an umbrella term that covers a variety of financial products and services that are useful to both importers and exporters. Some of the most common types include:
- Invoice financing
- Export finance
- Import finance
- Supply chain financing
- Stock/asset finance
- Purchase order finance
How Can Trade Finance Services Benefit Businesses?
Trade finance packages help facilitate growth through securing the cash necessary for stock purchases. Ensuring cash flow is critical to business continuity and trade finance is simply a tool that allows businesses to access capital tied up in fixed assets.
The benefits of trade finance are that the agreement terms are often more favourable to importers/exporters than traditional business finance. Reducing payment gaps in a trading cycle is beneficial to the whole supply chain and aids growth.
Benefits of Trade Finance
- Access to short & medium-term capital using assets or services as collateral
- Increases revenue potential of a company with early payments from clients allowing for higher margins
- Allows companies to place larger orders and request more stock that lead to bulk discounts
- Strengthens relationships between buyers and sellers by minimising disruption
- Allows companies to be more competitive
- Access to earlier payments mitigate risk for suppliers
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