What Does Trade Finance Mean and What Are Its Benefits?

People say business is a balance between taking risks and planning well to get your desired returns. When the business is cross-border, like export, all these factors are heightened. This is why the government, financial institutions, leading fintech businesses, and an international trade platform like LeRemitt offer much support.

One of the main areas in which exporters seek support is finance. Ensuring that you have your financial support sorted ensures that you can focus on the development of your business without stressing about keeping the business running and meeting orders. To mitigate these concerns, we will delve into trade finance in this article.

What is trade finance?

Trade finance is the collective term for finance-related tools and services available to exporters and importers, in other words, cross-border finance. Trade finance helps exporters manage costs, risks, and the complex machinations of international trade.

Exporters often receive large orders while still awaiting payment for their earlier consignment. This gap can pose a challenge if the business is new or is not used to handling larger orders. Proper financial support to keep your business running is essential at this juncture. When you accept international payments, having your finances sorted will ensure liquidity, put you in a position to offer payment guarantees to vendors, and have various risk mitigation measures in place.

Here are some of the types of trade finance available to exporters.

1. Letter of credit: A letter of credit is the importer or buyer’s bank guaranteeing the exporter that the payment will be made if they meet specific conditions related to the transaction. This can include quality, quantity, and date of delivery of the goods being purchased. Exporters often use the letter of credit (LC) as leverage to get a small-term loan from their bank or financial institution.

2. Export credit insurance: This type of insurance will protect exporters from the risk of non-payment from international buyers due to any reason. For instance, you have exported to a particular country where the goods have reached, and the importer is happy with the goods. However, they cannot make the payment at once due to political reasons. Insurance will protect your interests in such cases.

3. Trade loans: As an exporter, you can access trade loans or working capital loans to help with financing your manufacturing, shipping, or other business-related costs. There are specific banks or financial institutions geared specifically to meet the needs of exporters.

4. Invoice or bill discounting: When an exporter gets an invoice or bill promising to pay in the future, they can get these bills discounted by a bank to get short-term finance. Bill discounting allows exporters to access funds earlier. Then, the bank or financial institution will collect the amount from the buyer when the invoice or bill comes due for payment.

5. Forfaiting: This involves selling medium or long-term receivables from export-related transactions backed by a bill of exchange or a promissory note. Exporters can get funds upfront and transfer credit risk to the forfaiter.

6. Guarantee from the bank: A bank can promise the importer to assure them that the exporter will fulfill the contract. The bank will compensate the importer if the exporter fails to deliver the goods of the requisite quality and quantity.

7. Supply chain finance: This financing option comprises various options, including the pre and post-shipment stages. Supply chain finance helps with various levels, such as procurement, inventory management, logistics, and more.

Trade finance helps exporters manage all aspects of the trade by providing financial support. However, you must prepare the groundwork well to get trade finance with satisfactory terms.

Here are some tips to get it right:

1. Explore all internal sources before stepping outside to look for finance

2. Do your due diligence while getting into business with any buyer

3. Talk to your bank or financial institution to get an idea about all your options

4. Be clear in objective for trade finance while approaching the relevant authorities

5. Talk to experts in this area to understand government schemes to help exporters

6. Understand the document and information-related requirements to get finance

7. Avoid any unauthorized agents or companies offering loans to avoid fraud

8. Factor the cost of financing into your profit margin before finally pricing your deal

We hope the above information and tips to access trade finance helps you. Want to learn how LeRemitt can enrich your export journey? Click here to discover more!