Cross-border trade, while being crucial for the growth of the global economy, involves a few uncertainties and risks that mainly affect importers and exporters.
One of the biggest uncertainties faced by importers is the availability of funds to buy products from overseas.
Receiving payment for goods on time from buyers across international boundaries is one of the biggest risks for exporters.
International trade finance aims to minimize these risks for all stakeholders involved in international trade by extending monetary support and assurance.
International Trade Finance Meaning
International trade finance refers to the financial support given by banks or other financial institutions using a variety of financial tools, like bank guarantees, letters of credit, to importers and exporters to enable them carry out commercial transactions without experiencing financial hardships.
The parties involved in international trade finance are importers, exporters, banks, trade finance companies, etc.
Who Uses International Trade finance?
Parties utilizing international trade finance are importers, exporters, traders, producers, manufacturers, etc.
Who provides Trade Finance?
Several financial firms besides banks provide secure and trustworthy import and export finance services for their corporate clients.
For their corporate clients, many financial institutions focus on managing various financial goods, such as investments, loans, deposits, and more.
Companies that need cash for ongoing business transactions can obtain advance funds from financial institutions with a valid operating license.
In addition to the aforementioned financial institutions, several financial intermediaries, such as agents and third-party service providers, collaborate with financial corporations and support foreign trade transactions.
It consists of insurance brokers who can direct you to insurance companies.
Traditional Commercial Banks
Both small and big, domestic or multinational banks offer international trade finance services to businesses worldwide.
How is International Trade Finance different from other Financing Options?
International trade financing has a few key differences from traditional finance or credit issuance.
Finance for international trade may not always be a sign that a buyer is short on cash or liquidity, whereas generalized financing is used to manage solvency or liquidity.
Instead, trade finance globally can be used to safeguard against the unique dangers that come with international trade, like exchange rate changes, political unpredictability, creditworthiness of one of the parties, or, problems with non-payment.
To facilitate numerous financial transactions between importers and exporters, trade finance includes a variety of trading intermediaries, like banks and other financial institutions.
They take on the role of a third party and eliminate the risk of payment and supply between the customer and vendor.
According to the agreement, the exporter receives the receivables or payment, and the importer may provide credit to complete the trade order.
Letters of credit, export credit, lending, forfaiting, factoring, etc are a few of the many diverse types of activity that come under the broad categorization of trade finance.
Types of International Trade Finance
While general funding is frequently used to ensure solvency or liquidity, international trade financing can shield buyers and sellers from the hazards of international trade, and can be extended through various forms.
Following are the various types of International trade finance:
Letter of Credit
A letter of credit is a document that verifies the availability of funds and is issued by a financial institution on behalf of the buyer, assuring the seller that they will promptly receive the total amount due in exchange for the goods and services they have delivered.
The financial institution will pay the seller in part or in full when the terms and conditions of the issued letter of credit are met, but the buyer cannot do so.
International businesses can obtain international trade finance services from home or foreign banks, small or large.
A bank may give this type of guarantee, acting as a security if the importer or exporter cannot uphold their end of the agreement. Hence, businesses can seek financial assistance in the form of bank guarantees.
Factoring is a financial tool that businesses and organizations can use in need of immediate cash.
Factoring is a practice of selling business account receivables to a third party, known as a factor.
The trade financer or the factor purchases the exporter's invoices at a discounted price. The factor receives the entire purchase price from the business customer or client.
Export credit is a guarantee, insurance, or credit that enables a foreign buyer of products or services to postpone payment over time. Companies that conduct business abroad might obtain these financial services via export credit agencies.
The exporter exchanges cash for all their accounts by selling them to a forfaiter at a reduced price. Forfaiting is a method by which the right to claim export receivables of an exporter is sold to a forfaiter without recourse.
Risks like loss of cargo, damage to goods, and non-payment from the buyer’s side are fairly common in international trade, and can negatively impact exporters.
Insurance plays a huge role in the delivery and shipping of the items and in safeguarding the exporter from these risks.
Benefits of International Trade Finance
Enables financial assistance International trade finance enables various businesses to raise money to support smooth international transactions, assisting them in avoiding any disruption due to sales made on credit or any other issue.
Businesses, importers, and exporters turn to international factoring or forfaiting to eliminate any financial risks on account of sales made on credit.
Improved relations between buyers and sellers International trade finance helps businesses by providing immediate cash to enable trade.
By ensuring that both buyers and sellers are able to meet their financial obligations with each other, allowing buyers and sellers to maintain healthy and stress-free trade relations.
Expand their global operations With international trade finance, businesses can increase or expand their global operations and make money through trade by providing financial assistance.
Expanding global operations will come with ease when working capital is not disturbed or blocked due to sales made on credit to overseas buyers.
Since international trade finance can also aid businesses in lowering the dangers of financial non-payment from overseas buyers, expansion of global operations can be initiated.