Trade finance makes possible import and export transactions for entities ranging from a small business importing its first private label overseas product to multinational companies importing or exporting large quantities of inventory every year in the world.
Small businesses often have very limited access to borrowing and other forms of interim financing to cover the cost of goods they are considering buying or selling. Even with confirmed product orders, many banks will not provide loans or overdraft protection for these types of transactions.
What is Trade Finance?
There are different definitions online about what trade finance is, and the choice of words used is interesting. In its simplest form, an exporter requires an importer to pay in advance for the goods being shipped. The importer naturally wants to reduce the risk by asking the exporter to document that the goods have been shipped. The importer's or exporter's bank assists by providing a letter of credit for payment upon presentation of certain documents. The bank can make a loan to the exporter based on the export contract. The type of document used in the process depends on the nature of the transaction and how the proof of performance can be presented. It is worth noting that banks deal only with documents and not the actual goods, services to which the documents may relate.
What are the Pros and Cons of Trade Finance?
Since international trade takes place across borders and companies do not know each other well, there are various Pros and Cons to manage trade finance. These included:
Advantages of Trade Finance
- A tailor-made option for businesses that need to offer letters of credit or cash deposits to secure orders with suppliers, both locally and internationally.
- Funding can be up to 100% of eligible purchase orders.
Disadvantages of Trade Finance
- Letter of Credit may need to be cash-backed or have real estate as collateral.
- Non-bank providers do not always require a property guarantee. The warning is that the products must be pre-sold and be a finished product (fully manufactured and salable). Anything that requires additional manufacturing or packaging is not eligible for this financing option.
Whether you need financing to meet your commercial commitment, or you are paying for the goods before shipment, or whether you need peace of mind when negotiating with someone you have not yet established a relationship with solid choose the appropriate trade finance company who can provide you with flexible terms and fast access to capital.