Trade finance deals with exports and imports. The importer must get what they ordered while the exporter is paid for the goods and services they have supplied. Both large business entities and startups are involved in this. But what is the gist of trade finance? Well, companies may not have the cash flow to buy large shipments and wait for them for over a month, and that is where trade financing by a third party comes in. The financiers carry the burden and risks of paying for these goods until they reach their destination where they get paid by the importer. With their commission included, of course.
What Entrepreneurs Should Understand
As the number of risks in handling international importation and exportation increases, the banks, which are the main intermediaries, have evolved to increase trade finance measures.
Access fears resolved: In the early days, both importers and exporters had something to worry about. Importers were not certain if they would receive their orders on time, in good condition, or even receive anything at all despite making upfront payments. On the other hand, the exporters were worried about when they would get paid or whether they would get paid if they dispatched goods without receiving money. This access fear has since been resolved by the availability of trade financing options where banks pay the exporters at the point of receiving the goods and get paid by importers upon delivery of the goods. Problem solved!
Technology has played a role: To further enhance trade finance, technology has played a crucial role. There are now different solutions and software that link these three important people: importers, financiers, and exporters. According to global business experts GRS, who help entrepreneurs with such solutions, any business is eligible to embrace that technology and benefit from it.
Trade Finance Options
Banks do offer some packages to the importers, who are the main beneficiaries. Remember that they need to pay for the goods as late as possible, probably at the receiving point. But on the other hand, the exporters want their payments upfront when possible. However, some of the packages to get from the financiers include:
Bank guarantee: Though the exporter will not get the money upfront, they are certain that they will eventually get paid. The bank guarantees that should the importer fail to pay, they will take full responsibility and pay the money. As much as this is not what many exporters want, it stills works for both parties in an excellent way.
Credit note: This is the most preferred method for many exporters. They get paid by the bank the moment they present all the documents. The banks will take all of the risk of paying for the goods before they are delivered to the importer.
That is all about trade finance, though some situations can change depending on the agreement with the involved parties. When conducted well, all parties benefit, especially the importer who can easily control the cash flow.