With the aid of trade finance, international trade has been able to grow exponentially. Operating as an umbrella term, it offers businesses the opportunity to make use of a vast number of financial measures and products when conducting trade transactions.
Understanding the Concept of Trade Finance
Trade finance refers to the varied processes in place that allow for international trade and commerce to be carried out. Made use of by a number of companies and banks, trade financing makes it possible for importers and exporters to conduct a wide array of transactions with high levels of efficiency. Trade financing can be understood to be an umbrella term that encapsulates several financial products that are made use of by companies and banks.
Trade Financing’s Key Ingredient
By featuring a third party that is present within all business transactions operating within the realm of trade finance, the risks pertaining to payment and supply are kept at bay.
Both, exporters as well as importers are expected to abide by the terms laid out in their agreement.
Participants that are known to make use of trade finance include banks, companies dealing with trade financing, export credit agencies, importers and exporters, insurers, and service providers.
The Role Played by Trade Finance in Business Transactions
Trade financing is a sought-after mechanism as it allows for companies to reduce the risks they are exposed to by partaking in global trade. Moreover, it allows for them to grow and expand by allowing them to carry out their operations with ease which consequently helps accrue greater cash flows along with revenue and earnings.
In order to understand the role played by trade finance in allowing for these benefits to arise, read on below.
Assists with Vendor Financing
When in charge of a relatively new company that’s ready to take off, it isn’t unusual to find that the demand for the commodity produced increases at a level that those in charge might not be equipped for. Depleting inventory reserves interspersed with limited cash on hand can eat into the ability to handle orders required to meet the demand. Furthermore, overseas suppliers may expect to be paid prior to shipping supplies. With the aid of trade financing, it is possible to acquire vast sums needed to account for higher levels of export and import financing.
Allows for Export Financing
New retail enterprises can be extremely competitive with one another. Although producers of the same might produce popular products, their demand can vary within the year and can result in retailers of the same selling it at lowered prices during sluggish seasons thereby reducing profits. With the aid of the post-shipment finance facility available under trade finance, it is possible to extend payment terms with the most well-performing retailers. As a result, these retailers will now have greater time frames within which to accumulate profits while the business in question can retain its liquidity.
Takes Advantage of Inventory Financing
Although businesses are capable of growing with increased sales over the years, part of this growth is possible provided payment terms are extended to retailers. This may result in cash reserves being stretched to an unsustainable level further resulting in difficulty handling new orders. Businesses that have a good standing and deal in highly popular goods that are in demand can take advantage of the services that companies that offer import and export financing under the umbrella of trade finance allow. With the aid of inventory financing, said businesses can have easier access to working capital that is constantly replenished allowing for their growth to continue on the trajectory anticipated.
Helps Factor Short-term Cash Flow Hiccups
With the aid of trade financing, businesses can resolve any short-term cash flow issues they face by reaching out to international factoring companies that offer trade financing services. Such companies can buy the business’s account receivables provided the business owner offers them an advance which amounts to the majority of the invoice in its totality.
Trade financing allows for purchasers of the same to avail of financial implements and tools in a number of currencies thereby eliminating the upfront risks associated with currency exchange in such a scenario. Trade finance allows for a company’s business model to operate on a global level while allowing business transactions to be conducted with high levels of agility and flexibility.
Trade finance helps companies conduct business transactions on a global level with greater flexibility and more efficiency in place. It is, therefore, no surprise that international trade volumes have skyrocketed due to the same.