Trade finance is helpful in making import and export transactions easier for entities. It includes small business to large corporations importing or exporting goods around the globe. Needless to say, it is quite difficult for small businesses to access loan and other types of financing. And this is where trade finance plays a key role. It covers different types of activities, including issuing letters of credit, lending, factoring, and export credit and financing.
Let’s explore important facts about trade finance with Dr. Vasileios Xeniadis.
Trade finance reduces payment risk
Back in time, international trade was hard. At that time there was no guarantee whether the importer would get all the ordered goods, and exporters would get the payment. Exporters always find ways to reduce the risk of payment from the importers. Trade finance reduces payment risks by making the payment process faster, and confirm surety to importers that all the ordered goods have been shipped. The job of importer’s bank is to provide the exporter with a letter of credit that goes to the bank of an exporter as payment. But only once shipment documents are presented.
Reducing Pressure on Both Importers and Exporters
Trade finance has contributed to the growth of economies across the globe by bridging the financial gap between importers and exporters. It builds transparency between exporter and importer which helps in preventing importer’s default in payments. Additionally, an importer is sure that all the goods ordered have been shipped tested by the trade financier.
Trade Finance Products and Services
Trade financiers, including banks and other financial institutions, offer different products and services to fit the needs of various types of companies and transactions:
Letter of Credit: is a document that confirms that once the exporter presents all the shipping documents as mentioned by the importer’s purchase agreement, the bank has to make the immediate payment to the exporter.
Bank Guarantee: If the importer or exporter fails to fulfill the terms and conditions of the contract, the bank has to interfere and act as a guarantor.
Forfeiting is an agreement according to which the exporter sells all of his complete accounts receivable to a forfeiter including a discount in exchange for cash. And this is how the exporter transfers his debt to the importer to the forfeited. However, the importer’s bank should be guaranteed the receivables accepted by the forfeiter.
Factoring in Trade Finance
Generally, exporters use this factoring method to accelerate their cash flow. As per this agreement, the exporter has to sell all of his open invoices to the factor who is a trade financier. Further, the factor has to waits until the payment is made by the importer. It actually benefits the exporter in preventing the risk of bad debts. Also, offers working capital so they can continue with trading.
These are the few facts about trade finance shared by Dr. Vasileios Xeniadis. To know more about trading, investment banking, factory, etc., feel free to write to us. You can share your query or feedback below in the comment box.