TRADE FINANCING: EXPLAINED
What is trade finance?
means financing with trade concerning both domestic and international transactions. It involves both a producer and a consumer. Banks and financial institutions facilitate these trade transactions by financing the trade. It acts as a medium to represent the financial products used by different countries to facilitate international trade and commerce. It covers multiple financial instruments that all the banks and companies utilize to make their trade transactions. It revolves around selling products that allow the clients to import and export goods, bank as a guarantor in between them.
Basic Principles of trade financing:
Trade financing has operated on this basis for years. The exporter confirms the products and their shipment. This is done by putting forward a set of documents like bill of lading, packing lists, inspection reports or certificates. Payment is made on the foundation of the documents and before the goods coming to the buyer. Moreover, the buyer cannot receive the goods without the documents. If the payment does not come, the control of the goods remains in the hands of the exporter. Therefore, it is also called a documentary credit.
Importance of Trade Finance:
- Helps reduce the global trade risk by accommodating the divergent needs of both an exporter and an importer.
- It has become a common and crucial medium for companies to improve efficiency and boost their revenue.
- It improves cash flow, and the efficiency of operations carried out by the banks or companies.
- It is beneficial if one wants to expand their business and generate revenue through trade.
- Allows countries to expand their market and access the goods and services that otherwise might not be domestically available.
Benefits of trade financing
Growth of business:
Since it minimizes risk and allows the supplier to increase his working capital, it leads to the growth of the business.
The importer and the exporter do not have to disturb their working capital that can be used in other techniques. It results in an easy and convenient flow of cash. The supplier will not have extra credit due from banks and financial institutions which will lead to an increase in investment.
The suppliers receive the money for their goods before the delivery takes place in trade financing. It ensures that the suppliers are always paid and do not have to account for bad debts.
By reducing payment gaps in the trading cycle, a trade credit facility can allow one to provide more competitive terms to both suppliers and customers. It is advantageous to supply chain connections and expansion.
Advantages in trade financing:
Trade financing enables a company’s growth by attracting funding for the purchasing of products and inventory. Cash and working capital management are vital to every company’s growth. Trade receivable is a method for unlocking liquidity from a company’s current stock or receivables, as it adds other financing options depending on the company’s trade periods.
Trade advances help increase sales: A customer tends to buy more significant quantities of a commodity at credit over when he is asked to pay in cash instantly.
Consumer Satisfaction: An objective of a business is its consumer Satisfaction. Pursuing goods in credit makes the consumer happy, thereby increasing its Consumer Satisfaction.
Common knowledge about trade financing is essential among the suppliers and traders. People concerned with international trade can benefit a lot from this if they use it correctly.