How Trade Finance Instruments Help My Business Grow?

The sound availability of finance is vital for the smooth operations of business activities. Organizations that heavily rely on the global supply chain, require a constant and comfortable level of liquidity to cater to their daily working capital requirements.

No matter what size your business is, you could run a small business importing products/materials from overseas, or multinational organizations importing-exporting a huge stock of inventory globally.

Unfortunately, obtaining the desired level of liquidity is not easy for most businesses, considering an immense portion of business capital is stuck in its inventory, or worse, confined to a string of invoices that are yet to be paid.

This is where the concept of trade finance comes into the picture. Regardless of your company’s size and position within a supply chain, there are companies offering import-export financing solutions, designed to help you grow. Here, we’ll learn about different types of trade finance instruments illustrating help you:

What is Trade Finance?

Setting up a business, watching it develop, and taking it globally is a tough & daunting process. Here, finances play a crucial part.

Trade finance service is simply the financial assistance provided by banks or FIs to facilitate uninterrupted import-export of goods in international trade. A plethora of trade finance products is available for global importers & exporters to select from. Here they are as follows that you can choose to help you grow a business:

1. Export Financing

Export finance, also known as export credit, is a process of providing finance to suppliers/exporters involved in a global trade transaction with overseas buyers/importers. Export finance allows exporters to access working capital while buyers pay invoices.

Since the buyer often pays their suppliers within an agreed payment term which is generally between 30 to 120 days. This extended period brings a cash crunch for exporters. Here, export finance acts as a cash solution for them.

2. Invoice Factoring

There are a variety of global factoring companies which resolve exporters’ working capital or cash flow issues by purchasing their account receivables in exchange for an advance on the majority of the total invoice value. You can approach a bank or financial institution and present your invoice to them. They can purchase, collect or discount the bill. After that, they collect the full amount from your customer upon invoice maturity. You no longer have to wait for an extended payment period to pay you.

3. Trade Credit Insurance

Trade credit insurance is a type of international trade finance favored by exporters/suppliers to protect against its importer/customer’s inability to pay for ordered goods or services. For example, bankruptcy, insolvency, or political disruptions. Before entering into a trade transaction, an exporter can purchase trade credit insurance from an insurance underwriter, who will charge a fee based on the perceived risk of the transaction. Such risk factors include distance, mode of transport, the value of goods shipped, buyer’s creditworthiness, etc.

4. Letters of credit (LCs)

LCs or Letters of credit are one of the most common types of trade finance instruments in global trade. An LC is simply a legal document issued by a bank or FI on the request of its applicant i.e. buyer/importers to guarantee an on-time payment to the exporters for the ordered goods & services. In case the buyer defaults or is unable to fulfill the T&C of the contract, the issuing bank will be responsible to pay the exporter. Later, the bank can claim the payment from its applicant.

Under a letter of credit service, the exporter can avoid the risk of payment failure as well as the buyer can provide its creditworthiness to the suppliers.

5. Bank Guarantee

A Bank guarantee or BG is also a trade finance instrument designed to protect the sellers against the risk of non-payment by its buyers. They are most commonly used in domestic transactions where the issuing bank guarantees on time to the seller on behalf of the buyer in case of a default.

Under a bank guarantee service, the seller gets the peace of mind that they’ll get paid, regardless of the buyer’s capability. On the other hand, the buyers also rest assured that the seller will ship the goods as mentioned in the BG contract, hence generating a sense of trust among both the parties.

6. Term Loans

Term loans are a type of financial assistance provided by banks or FIs to businesses in the form of lending where the borrowed amount is required to be repaid in installments over a certain period of time. Generally, there is a period of up to 10 years, but in some cases, it can go up to 30 years.

Such term loans are provided at a certain rate of interest which a borrower needs to pay along with the principal amount.

7. Open Account

It is a trade payment arrangement between the buyer and the seller where the buyer will pay for the goods after being presented with a bill of lading. In other words, in this type of arrangement, the seller ships the goods first, and then receives payment up to 90 days later.

Undoubtedly, this trade finance instrument is more beneficial for the importer in terms of cash flow and cost but simultaneously, a risky option for an exporter.

Originally Posted: https://www.emeriobanque.com/blogs/how-these-trade-finance-instruments-help-my-business-grow