Trade finance concerns national and international trade transactions- when a buyer purchases services and goods from a seller, the financial activities involved come under this term. It is a huge driver of economic development and helps maintain the flow of credit in supply chains. The exporter's bank may make a loan to the exporter on the basis of the export contract. In simple term, an exporter requires an importer to prepay for goods shipped. The importer naturally wants to reduce risk by asking the exporter to document that the goods have been shipped. The importer’s bank helps by offering a letter of credit to the exporter providing for payment upon presentation of certain documents, such as a bill of lading.
It is useful to note that banks only deal with documents and not the actual goods, services or performance to which the documents may be relating to. Trade finance
helps settle the conflicting needs of the exporter and the importer. It has many beneficiaries: developing countries, small and medium enterprises, and governments. Most businesses require financing at some stage, particularly those in the international export or economic benefits, individual companies benefit from export finance as it generally increases productivity, profitability, and growth or global supply chain trade where capital costs are high and profitability is greater when order volumes are high. Important Factors of Trade Finance:- The cost of financing options -
If there are various financing choices to choose from, you have to look into them meticulously, most especially the interest rates. Amount of orders -
If you are receiving plenty of orders, your working capital might not be sufficient to meet such increased demandThe amount of time in which the product is financed -
This is considered the most important factor to consider
. The experts are highly stressed that your choice of financing will be greatly influenced by how long you will wait before receiving the payment.Risks -
Transactions are not created equal. There are those that are riskier than others. Economic and political stability can actually compound or increase these risks.