Trade finance is short-term working capital finance supporting domestic and cross-border trade transactions. It’s used by businesses to finance their trade activities and bridge the funding gap between buying stock and receiving payment from their customers. It can be an extremely useful tool for businesses as it helps mitigate risk, improve cash flow, and increase revenue and earnings. This blog will dissect trade finance and how it can help your business.
What is trade finance?
Trade finance is an umbrella term that covers many financial products that banks and companies utilise to make trade transactions feasible. In this instance, trade financing is the process of funding a trade involving exchanging goods, commodities and financial instruments between the two parties. It allows businesses to borrow money against their purchase orders and makes it easier for importers and exporters to transact business through trade. The lender will pay for the purchase, and the company will have 120 days to repay the lender. The facility allows businesses to set payment terms that are favourable to them. It will also enable businesses to order more significant amounts of stock or inventory, which helps achieve lower prices on their cost price, in turn increasing the margins on their products.How does trade finance work?
Trade financing works a little differently than traditional business financing methods or credit issuance. It introduces a third party to transactions to remove payment and supply risks. It also provides the exporter with receivables or payment according to the agreement, while the importer might be given credit to fulfil the trade order. The parties involved in trade finance often include:- Banks
- Trade finance companies
- Importers and exporters
- Insurers
- Export credit agencies and service providers