Four Must-Know Factors About Trade Finance
Import and export is made easy and possible to both small and large-sized company when a trade finance facility is in place. While small business often suffers from having lack of access to bank loans, large corporates on the other hand are often uncertain as to whether they will receive their payment or not. Business owners, irrespective of the size, don’t want their money being caught up due to delays in receiving shipment.
Sense of Relief to Both Parties
Trade finance now bridges the gap between importers and exporters, where importers are no longer concerned about not receiving goods and exporters bidding farewell to the risks of delayed or no payment.
Prevents Risks Associated
During the initial days of international trade, most exporters weren’t sure of whether or when they would receive their payment from the importer. Over time, these exporters then tried to source various methods in order to prevent the risk of non-payment from importers. On the flip side, importers were also uncertain of making advance payments, as there was no guarantee of receiving the goods. Trade finance has then evolved in order to address such issues, thereby guaranteeing importers of receiving their goods and exporters of receiving payment. A letter of credit is issued by the importer to the exporter’s bank, as a form of payment, once the shipment documents are presented.
Increase Cash Flow
It is a very common approach used by exporters to accelerate the cash flow into their business. This agreement enables the exporter to sell their goods at a lower price. The exporter then waits until importer makes the payment. It provides the exporter with a sense of relief that of receiving their payment.
Trade Finance Services
It is a common practice by banks and other financial institutions to offer varied products and services to suit the needs of varied companies and transactions.
LC – it is an oath taken by the importer’s bank which states that the exporter will receive the payment once the shipping documents have been presented by the exporter’s bank. Only then will the payment be released.
BG – the bank acts as a guarantor in case either party fails to fulfil the terms mentioned in the contract. They will then pay the decided amount to the beneficiary.