Everything To Know About Trade Financing For Beginners

A lot of people are involved in trade financing – a buyer, seller, trade financier, export credit agency, and insurer. Banks and other financial organizations facilitate the buyers and sellers during financial transactions. For the transaction to push through, the financial institutions pay on behalf of the buyer. This can be local, international transactions, or both. But ever since trade financing has become more accessible, global trade has grown a lot.

Types of Trade Finance

Whether you are a small business importing products from overseas, or a huge enterprise importing or exporting huge quantities of goods globally, both can definitely benefit from trade finance. Here are the types of trade finance that you should consider.

  • Letter of Credit. The importer’s bank pledges to pay the exporter as soon as all shipping documents and proofs are presented. This can be for both small and huge companies importing/exporting products.
  • Purchase Order (PO) Finance. Specifically for small and medium-sized businesses struggling with cash flow. This provides the funds to pay vendors who can present a valid purchase order. This makes sure that money keeps coming in to avoid delivery delays.

trade financing

  • Supply Chain Finance. Sellers, buyers, and even banks use this option. This helps improve the terms of payment as well as the cash flow in the supply chain. This is where a buyer could try to get more time allowance to pay while the seller gets paid on time and the goods are sent for delivery.

Benefits of Trade Financing

There are businesses that get involved in importing or exporting goods. With trade finance, it is easier for businesses to do so. However, unlike larger companies, small businesses don’t have as much access to loans and other short-term financing options.

You have to understand that most banks won’t give out loans that easily or cover overdrafts even if there’s a sure transaction. If you want to know a little bit more about the benefits of import financing, then read on.

  • Reduced Payment Risks. Trade financing helps reduce any payment risks because it speeds up financial transactions. As soon as the paperwork for the shipment is received, the importer’s bank sends a letter of credit to the bank on behalf of the exporter.
  • Build Importer/Exporter Trust. Trade financing has helped importers and exporters get the funds they need. Exporters no longer worry that importers won’t pay them, and importers know that all the items they ordered have been sent by exporters. This builds the trust between buyers and sellers.

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