When it comes to trade finance, it cuts across virtually every business endeavor one ventures into. Therefore having a full grasp of that will help you in your business transactions.
Businesses that are small scaled have limited access finance when the growth of such business is concerned. Especially when such a business or company wants to make a trade that would normally would have been too much for that business to afford except it’s funded.
Generally, every business that deals with Importing won’t want their goods to get trapped in shipment and one thing business people don’t joke about is their goods because goods are investments to them.
Also, businesses or companies that deal with exporting also have to wait for a period of time mostly this depends on the location of the goods before they can be paid a portion of their money and once the goods gets to their destinations, the full payments would be made.
1. More security in payment delivery
Trade Finance has brought down the fears of traders in general before in time past, doing businesses that require importing and exporting was a bit risky because as an exporter you really don’t know when your customers will pay you your money once your goods have been delivered to them.
What most of these exporters at those times was to depend on trust and credibility, if an importer gets some goods and pays up as agreed, the exporter would want to sell more to such an importer and can also trust more goods that the importer would normally buy to such an importer because of his or her reputation.
The importers on the other hand had fears of having their money stuck with the exporters before they deliver their goods.
But when the knowledge of trade financing came into play, such insecurities have been greatly minimized by which the exporter gets his money for the goods sold as at when due and the importer is guaranteed of his goods being delivered when payments have been made.
The importer’s bank plays a major role here in that the bank provides the exporter with a letter of credit as a form of payment when the exporter has successfully fulfilled all the required documents for the purchase.
2. It takes the load off exporters and importers
This concept of trade finance has helped importers and exporters a lot when it comes to payments.
As a result, importers are no longer skeptical about their goods because they know they have been vetted by their trade financier and exporters are at ease because they know they won’t be cheated with respect to their payments.
This basically is a concept in trade financing where the exporter receives cash for selling all their receivables to a forfaitier. The forfaitier can be a bank or a financial firm so don’t start imagining something else.
Be doing this trade, the exporter transfers all debts to the forfaitier but before this trade happens, the importer’s bank must have verified the transactions because the importer takes the goods without paying for them until the goods are sold.
4. Trade finance factoring
One way for exporters to grow their cash flow is through this approach. How it’s done is this; an exporter sells all his open transactions to a trade financier at a discounted price.
Here, the trade financier hold a on until payments have been made by the importer. For an exporter this is a good approach to business because it helps to minimize the occurrence of bad debts and at the same time providing funds for their businesses.
Products and services offered by trade financiers
Just as i mentioned in one of the previous points, i said trade financiers are banks and financial institutions. Some of the products and services they offer include the following.
- Letter of credit
- Bank guarantee
1. Letter of credit.
This is a form of agreement taken by the importer’s bank to the exporter saying that once the exporter is able to provide the necessary documents for which the transaction was made, the bank will pay exporter as soon as possible.
In this case just as the name implies, the bank serves as a guarantor just in case the importer or exporter couldn’t fulfill their end of the bargain.
In this event, the bank therefore pays an amount to the one who owns the money.