Wednesday, June 12, 2024
HomeFinanceInternational Trade Finance - How Does It Works

International Trade Finance – How Does It Works

International trade finance represents the financial products and instruments that are used by various companies to facilitate international trade and commerce. It makes it easier and possible for all exporters and importers to transact their business.

What is International Trade Finance?

International trade finance is an umbrella that can cover many financial products and resources that companies and banks are equally important to utilize to make the various transactions of trade feasible.

How Does International Trade Finance Work?

Although the main function of International Trade finance is to introduce the transactions to the third party to remove the supply risk and payment risk. It provides the receivables and payments to the exporters according to their agreement. Whereas, the exporters might extend their credits to fulfill the orders.

There are numerous parties involved  including the following:

  • Trade finance companies
  • Banks
  • Insurers
  • Importers and exporters
  • Service providers
  • Export credit agencies

Types of International Trade Finance

Below are instruments that are used in many types of trade finance:

  1. Insurance can be used for the delivery of goods and shipping. It also protects the exporters from the buyer’s non-payment. 
  2. Lending lines of credit in trade can be easily issued by banks to help both exporters and importers.
  3. Moreover working capital or export credits can be supplied to the exporters.
  4. Factoring of finance of international trade is done when a company is paid based on their account in addition to the receivable percentage.
  5. Letters of credit in various types of risk associated with global trade. Since the bank guarantees the payment of buyers for the goods shipped to the seller. However, the buyer is protected since the payment will not be made in the terms of LC unless they are met by the seller. Both parties are honored by the agreement for the transaction.

Although financing has been in the existence for centuries advancement in the widespread use of finance. 

Read More: How To Make Money in Stock Market

How does International Trade Finance Reduce Risks?

Finally, the finance of international trade helps to reduce various risks associated with global trade. By simply reconciling the divergent requirements of an importer and an exporter. Ideally, the exporter finance of its may accept the payment. But sometimes refuse to ship the goods for the same reason to the company in case the importer pays the upfronts to the exporters in advance. However, an exporter in the finance of international trade would prefer to pay upfront to the importer to avoid the risks of refusal to pay for the goods thereafter.

A common solution to this problem is that the bank provides a letter of credit to the exporters. Banks provide for payment once the exporter presents its legal documents of finance that prove the shipment occurred such as a bill of lading. This letter of credit guarantees the exporter of the shipped goods and the terms of the agreement that have been made between the exporter and importer under the financing of foreign trade and the payment is also issued by the exporter.

Read More: Top 7 Benefits Of Financial Management

Other Benefits 

Besides reducing the risk of non-receipt and non-payment of goods, finance of international trade has become an important tool to boost revenues and improve the efficiency of companies.

Improves Cash Flow and Efficiency of Operations

Various types of trad companies facilitate businesses to obtain finance and also an extension of credit in many cases. It allows companies to receive cash payments that are based on accounts receivables. 

In other words, international trade and finance ensure fewer payment delays in shipments that allow both exporters and importers to plan their cash flow and run their businesses more efficiently. You just need to think of finance as the trade of goods or using the shipments as collateral for companies’ growth.

Read More: Importance Of Investment Decision

Various types of Trade finance reduce the risk of financial hardships

A company might lose a key supplier or customer which could have long-term ramifications for the company and fall behind on payments without international trade finance. But if you have some options like account receivables and revolving credit facilities factoring cannot only help several companies to transact business internationally. But even help them in times of financial difficulties such as the loss of the company due to disasters, etc.

Increased Revenue and Earnings

Further, financing international trade allows companies to increase their revenue and business by trade. For example, a company in the U.S. that can land a sale with another company overseas may not have the ability to produce the goods and services that are required for the order received.

International Trade Finance – FAQs

What are the main elements of trade finance?

Ans. The main elements are listed below:

  • Letters of Credits
  • Term Loans
  • Working Capital Limits like Cash Credits and Overdrafts 
  • Invoice factoring and invoice distributing
  • Insurance
  • Export Credit

Why do we need international trade finance?

Ans. The main function is to introduce the transactions of a third party after all to remove the supply risk and payment risk. It provides the exporter with payment or receivable according to the agreement. On the other side, the importer might extend their credit to fulfill its order.

What are the documents required for the financing of international trade?

Ans. The legal documents required are listed below:

  • Air Waybill
  • Certificate of Origin
  • Bill of Lading
  • Combined Transport documents and more.

 

RELATED ARTICLES

LEAVE A REPLY

Please enter your comment!
Please enter your name here

Recent Posts

Most Popular