Trade Finance

• It provides the exporter with due payments according to the trade agreement

• It extends a credit facility to the importer to pay for the order

Trade financing differs from other forms of financial products in many ways. One, availing trade finance does not indicate a company’s lack of required capital. It entails that a trading company wants to safeguard itself from volatile geopolitical factors, like: 

• Foreign exchange rate fluctuations

• Political turmoil

• Issue of payments and supply chain

Issuance of trade finance products involves the following parties:

• Importers and Exporters: Importers and exporters are service receivers, which means they can avail of trade finance services.

• Trade Finance Companies: Trade finance companies are enablers providing international trade finance services. Letters of credit reduce the risk associated with non-payments for goods shipped.

• Credit Agencies: Credit agencies help banks assess the creditworthiness of your trading company.

• Banks: Payments made by the trade financing company are transferred to the exporter’s bank account. Banks also provide line of credit to importers and exporters.

• Insurance Corporations: The goods involved in foreign trade are insured by insurance corporations. Insurance also guarantees payments for goods shipped to the seller.

The global commercial market is inherent with numerous geopolitical risks. Trade finances are financial instruments that avert such risks. For instance, consider these two scenarios:

• A seller may take the upfront payment for shipping goods from the importer but may not ship them eventually

• An exporter may not receive payment from the buyer after shipping goods 

A viable solution to this problem is letters of credit issued by the importer’s bank. These letters guarantee payments to sellers once they provide proof of shipment to the bank. 

These can include a bill of lading for shipment invoice.

For this purpose, banks assess if the buyer is financially capable of making the transaction to the exporter. Between an importer and an exporter, a bank acts as an enabler of trust. Apart from these two, there are various other associated risks like political instability, wars, aggressions, etc.

2. Improves Cash Flow and Efficiency of Operations

Trade finance facilitates trade businesses by eradicating cash deficit issues and improving cash flow. As mentioned above, a company can avail the line of credit and factoring facilities to mitigate problems related to non-payment.

The importer’s bank guarantees payment to the seller once the shipment reaches its destination. In simple terms, trade finance allows international commerce to run smoothly by streamlining payments and shipping procedures. 

3. Increased Revenue and Earnings

Trade finance also enables companies to boost their earnings and revenues through the expansion of trade. For instance, an Indian exporter can ship goods to foreign markets but lack in producing that good.

However, international trade finance allows such exporters to complete this order by procuring those goods. In this way, exporters as well as importers can widen the scope of their businesses.

4. Reduce the Risk of Financial Hardship

With facilities like factoring and revolving credit, trade finance allows trade transactions to complete. 

With such financing options, exporters can fulfil their shipping orders without losing their customers. These instruments also help trading companies in times of financial crunch or hardships. 

• Control over funds and goods

• Control over the source of repayment

• Access to monitor the trade cycle of the transaction

• Security of shipped goods

The following are providers of the trade finance facility:

• Suppliers

• Banks

• Importers

• Syndicates

• Trade Finance Houses