How These Trade Finance Instruments Help My Business Grow?

The sound availability of finance is vital for the smooth operations of business activities. Organizations that heavily rely on the global supply chain, require a constant and comfortable levelofliquiditytocatertotheirdailyworkingcapitalrequirements.

No matter what size your business is, you could run a small business importing products/materials from overseas, or multinational organizations importing-exporting a huge stockofinventoryglobally

Unfortunately, obtaining the desired level of liquidity is not easy for most businesses, considering an immense portion of business capital is stuck in its inventory, or worse, confined toastringofinvoicesthatareyettobepaid.

This is where the concept of trade finance comesintothepicture.Regardlessofyourcompany’s size and position within a supply chain, there are companies offering import-export financing solutions, designed to help you grow Here, we’ll learn about different types of trade finance instrumentsillustratinghelpyou:

What is Trade Finance?

Setting up a business, watching it develop, and taking it globally is atough&dauntingprocess. Here,financesplayacrucialpart.

Trade finance service is simply the financial assistance provided by banks or FIs to facilitate uninterrupted import-export of goods in international trade. A plethoraoftradefinanceproducts is availableforglobalimporters&exporterstoselectfrom.Heretheyareasfollowsthatyoucan choosetohelpyougrowabusiness:

1. Export Financing

Export finance, also known as export credit, is a process of providing finance to suppliers/exporters involved in a global tradetransactionwithoverseasbuyers/importers.Export financeallowsexporterstoaccessworkingcapitalwhilebuyerspayinvoices.

Since the buyer often pays their suppliers within an agreed payment term which is generally between 30 to 120 days. This extended period brings a cash crunch for exporters. Here, export financeactsasacashsolutionforthem.

2. Invoice Factoring

There are a variety of global factoring companies which resolve exporters’ working capital or cash flow issues by purchasing their account receivables in exchange for an advance on the majority of the total invoice value. You can approach a bank or financial institution andpresent your invoice to them. They can purchase, collect or discount the bill. Afterthat,theycollectthe full amount from your customer upon invoice maturity You no longer have to wait for an extendedpaymentperiodtopayyou.

3. Trade Credit Insurance

Trade credit insurance is atypeofinternationaltradefinancefavoredbyexporters/suppliersto protect against its importer/customer’s inability to pay for ordered goods or services. For example, bankruptcy, insolvency, or political disruptions. Before entering into a trade transaction, an exporter can purchase trade credit insurance from an insurance underwriter,who will charge a fee based on the perceived risk of the transaction. Such risk factors include distance,modeoftransport,thevalueofgoodsshipped,buyer’screditworthiness,etc.

4. Letters of credit (LCs)

LCs or Letters of credit are one of the most common types of trade finance instruments in global trade. An LC is simply a legal document issued by a bank or FI on the request of its applicant i.e. buyer/importers to guarantee an on-time payment to the exporters for the ordered goods & services. In case the buyer defaults or is unable to fulfill the T&C of the contract, the issuing bank will be responsible to pay theexporter.Later,thebankcanclaimthepaymentfrom itsapplicant.

Under a letter of credit service, the exporter can avoid the risk of payment failureaswellasthe buyercanprovideitscreditworthinesstothesuppliers.

5. Bank Guarantee

A Bank guarantee or BG is also a trade finance instrument designed to protect the sellers against the risk of non-payment by its buyers. They are most commonly used in domestic transactions where the issuing bank guarantees on time to the seller on behalf of the buyer in caseofadefault.

Under a bank guarantee service, the sellergetsthepeaceofmindthatthey’llgetpaid,regardless of the buyer’s capability On the other hand, the buyers also rest assured thatthesellerwillship the goods as mentioned in the BG contract, hence generating a sense of trust among both the parties.

6. Term Loans

Term loans are a type of financial assistance provided by banks or FIs to businessesintheform of lending where the borrowed amount is required to be repaid in installments over a certain period oftime.Generally,thereisaperiodofupto10years,butinsomecases,itcangoupto30 years.

Such term loans are provided at a certain rate of interest which a borrower needs to pay along withtheprincipalamount.

7. Open Account

It is a trade payment arrangement between the buyer and the seller where thebuyerwillpayfor the goods after being presented with a bill oflading.Inotherwords,inthistypeofarrangement, thesellershipsthegoodsfirst,andthenreceivespaymentupto90dayslater

Undoubtedly, this trade finance instrument is more beneficial for the importer in terms of cash flowandcostbutsimultaneously,ariskyoptionforanexporter

Conclusion

Now you knowhowtheseseveraltypesoftradefinanceinstrumentscanhelpyourimport-export business grow in case of capital inefficiency. So, next time, when your business is in need of capitaltobuildinventoryorbuygoods,seekoutthebenefitsoftradefinance.