Majorly trade finance is categorised as import finance and export finance to facilitate various trade related activities.Trade finance is managed with some pre-defined set of rules termed as incoterms and ucp600 amongst them plays the most crucial role.
Importing of goods and services can be extremely worthwhile for traders who are willing to provide new products to their customers, while taking advantage of exchange rates and reduced production costs. Import finance allows businesses to buy consignments from global suppliers on credit from a lender or by institutions of trade finance with the help of trade finance tools. It is generally secured against various documentations such as invoices, bills of exchange, promissory note, bill of lading, letter of credit and other specific ones.
There is need for import financing because of the difficulties that traders and their import export business face while trading overseas alone. As an importer exploring various available finance options may lead to confusion. Thus, getting finance from institutions of trade finance such as commercial banks is always suggested. The implementation of Import finance has lead to immense growth in international trade and has encouraged traders to participate in global trade.
Export trade finance helps exporters in getting finance for various trade related activities. It is for assisting the traders who are willing to sell goods to international buyers. It results in increased sales of the customers, and availing more profit from those sales. Export finance helps exporters to get finance for the pre shipment and post shipment activities so that all the tasks can be performed smoothly even before getting paid from the importer.
The exporter may require short term, medium term or long term finance depending upon the type of commodities being exported. There exist different types of trade finance companies and trade finance institutions depending on the business needs and the nature of the export transaction. Export finance basically provides exporter financial support from manufacturing, production of goods to delivery of goods to the buyer. These facilities are provided using factoring and export factoring to import export business by trade finance providers.
It can be considered as a loan for exporter for accomplishing various tasks involved in the export of goods. Apart from this, there exist various methods of payment in international trade such as letter of credit, cash in advance, documentary collections and open account.
In order to understand how export finance is different from trade finance you can go through trade finance vs export finance.
After knowing what trade finance actually is let’s go through how to avail it. Here is a step by step procedure that must be followed in order to get export and import finance for various trade related activities. Before getting within the process lets first know from where you can actually get the trade finance. You can apply for it in the following
1. What is trade finance?
Trade finance personifies financing for trade. It is a specialist finance that can help a company to grow and increase trade. Global trade finance helps business in releasing working capital from domestic trade transactions. Export process is lengthy, cumbersome and expensive and involves certain risks too. Moreover payment terms can be long and very hard to manage. Even after careful time planning and financial management, exporting commodities can place incredible strain on your business. International trade finance thus becomes a key factor in the competition among various businesses. The crucial importance of trade finance is it exists to mitigate or we can say to reduce the risks involved within the trade transactions. These risks can be payment risks or corporate risks.
2. What are the products and services of trade finance?
Various global trade finance products and trade finance services are available in the market which can be categorised into short term, medium term and long term finance products. These are the methods of financing in international trade:
3.How does structured trade finance work?
This is used to finance high value supply chains. These tend to be long term trade finance even sometimes up to five years.
4. What is open account in trade finance?
Open account s a method of payment within the trade finance. It is a method in which the goods are shipped and delivered before payment is made, which in global sales is in 30, 60 or 90 days. This can be considered as one of the most advantageous options for the importer in terms of cash flow and cost, but meanwhile it is highest risk options to an exporter. So it is better that more attention must be given while offering open account terms and the exporter must seek extra protection using export credit insurance. Open account payment in international trade is not preferred by many customers as there is involvement of more risks.
5. What is document collection?
It is a type of transaction where the supplier entrusts the payment regarding the sale from his bank, which sends the documents that the importer needs to show to his bank, with instructions to provide the buyer with necessaries for payment. Then importer receives the funds and remits them to the exporter via banks which are involved in the collection and in exchange of the documents. This method involves the use of draft where the importer has to pay the face amount either at sight or within the specified time or on a specified date. D/Cs are expected to be less expensive than LCs.
6. What is an advance payment in international trade?
With this payment method, supplier can avoid credit risk as payment is received before the goods are transferred. In this most commonly used options are wire transfers and credit cards. From recent times escrow services are also becoming another option for small export transactions. Moreover it is termed as the least attractive option for the buyer as unfavourable cash flow is generated by this. Importers are also concerned that the products may not be sent if payment is made in advance.
7. How trade financing reduces risk?
Trade finance constitutes of instruments and products, which companies use for international trade and commerce to reduce the risks related in International trade transactions. Trade finance brings down the payment risks of importers and exporters by introducing a third-party to business transactions. The exporters get receivables or payments, as per the agreement; on the other hand importers receive credits to fulfill the trade order.
Usually, exporters consider getting paid upfront by the importer to reduce risks of not getting paid even after the importer takes the shipment. On the other hand, importers paying in advance also have risks of exporter refusing to ship goods after receiving the payment. To resolve this problem, trade finance introduces the Letter of Credit – which the importer’s bank provides to the exporter’s bank. Letter of Credit guarantees that once the issuing bank receives proof that once the exported good is being shipped and the terms of the agreement have been met, it will issue the payment to the exporter.
8. How trade financing reduces risk?
Trade finance is majorly important for exporters and importers since it ensures protection against the unique inherent international trade risks – like currency fluctuation, political instability, non-payment issues, credit-worthiness of any party involved in the trade and others.
Trade finance has evolved over the years to deal with financial risks in trade transactions like exporters’ risk of not getting paid even after the importer receives the shipped goods or the exporter refusing shipment of goods even after importer extends the payment of goods in advance. It works as a bridge between the financial gap between exporters and importers; thereby reducing the risk of non-payment or non-shipment of goods. Trade finance also includes various other activities in international trade transactions like issuing letters of credit, lending, forfaiting, export credit and financing, and factoring.
Trade financing is also important for companies as it helps them increase and expand their businesses and revenue through international trade and further benefit in both international transactions and times of difficulties.
9. Who benefits from trade finance?
Trade finance has encouraged several traders to take up to international trade and globalize their businesses. The major parties involved in trade finance are the buyer and seller, the trade financier, export credit agencies, and insurers. However, the major players who are benefited by trade financing are:
Importers are benefitted as trade finance bridges the gap between receiving the good and transferring the payment by providing a short-term finance provided by a third party to import goods into a country. Through trade finance importers can avail safe financing through usance/standby letter of credit, bank guarantees, invoice finance, asset-backed facilities.
Exporters are benefited by the trade finance as through it exporters get financial help required for purchasing, processing, manufacturing, packing and exporting of goods to overseas countries. Trade finance generally works as the credit facilities or techniques of payments at the pre-shipment and post-shipment stages.