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5 Things To Know About Trade Finance

What is trade finance? Why should we care about trade finance? Have you ever thought of importing or exporting large amounts of goods for your business? If so, this is for you!

Trade finance is a payment settlement service provided by banks that allows businesses to purchase goods domestically and internationally. Trade finance introduces banks as a third-party to the transaction to remove the payment risk and the supply risk between the importer and exporter.

Let’s take a look at the 5 benefits of trade finance for businesses.

1. Allowing cross-border trade

Whether you are a manufacturer or a buyer, you will face payment risk in international trade. Neither the buyer nor the seller can make sure that their business partner would fulfill their end of the bargain. Sellers (or exporters) would require the buyer to make a deposit or advance payment while buyers would like to delay the payment until they get their goods.

To tackle this problem, both parties can use trade finance as an intermediary. One of the most common trade finance products is a letter of credit. A letter of credit is a legal binding issued by a bank that the beneficiary (in this case, the exporter) will receive full payments for their goods once certain agreed upon criteria between the buyer and the seller is fulfilled. Usually, a receipt of shipment is required to be presented to the intermediary bank, proving to the bank that the goods have been shipped and are on their way to the buyer. Hence, the intermediary bank would settle the payment with the seller in advance.

2. Two main common trade finance instruments

There are two commonly known and used trade finance instruments such as:

Letter of credit: a promise by the importer’s bank to pay for the goods once the shipping documents are presented and other criteria in the contract are fulfilled.

Bank Guarantee: the bank guarantees if the importer or exporter fails to fulfill their end of the terms in the contract, the bank will cover the payment of either the party that uses the bank guarantee.

3. Financial flexibility

Trade finance provides cash flow flexibility as it does not require collateral like bank loans.

4. Allow SMEs to grow beyond the existing capital

Trade finance facilitates the growth of SMEs regardless of the capital they have in hand. It allows businesses to meet short-term capital demand efficiently and be flexible with their financing.

5. Factoring in trade finance

Exporters can get their pending payments immediately by selling their open invoices to the intermediary bank at a discount. This way, the exporters do not have to wait for their buyer’s payment while the intermediary bank makes a profit from the discounted purchase.

To sum up, trade finance is a financial instrument that helps businesses to confidently trade across borders. It creates confidence between the importer and exporter of different countries on top of providing financial flexibility and growth opportunity. Let’s use trade finance services to grow your business too!




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