Trade finance makes it easier to move goods around the world and participate in international business. So whether you've recently set up a small business and want to import your first product, or you're looking to expand your business's export trade, it’s important to understand trade finance and how it can help.
Confusingly, sometimes the term 'trade finance' is used when discussing trade credit – a different product which lets you purchase new stock or goods without paying cash upfront to your supplier. Read our article on trade credit for more information on this.
All sorts of businesses need to be able to trade internationally to function. The term trade finance refers to all the different instruments and products that allows you to do so. Trade finance services bridge the financial gap between the importers and exporters, adding a third party to the mix and, in doing so, reducing risk and making it easier to trade.
The phrase is an umbrella term, meaning it covers many different financial products that banks and companies use to make trade transactions feasible. It covers activities such as issuing letters of credit, as well as lending and forfaiting – all of which we’ll discuss below.
The different parties involved in trade finance include banks, trade finance companies, importers and exporters, insurers, export credit agencies.
Some examples of trade finance products and services used by these parties include:
According to the World Trade Organization (WTO) “some 80 to 90 percent of world trade relies on trade finance”. So if your small business trades internationally, or is likely to in the future, then you'll need to engage with trade finance to help mitigate the risks involved. Even with a confirmed order for products, many banks won't provide loans or overdraft protection for these types of transactions, so you may need a trade loan.
There are other benefits to trade finance, too. It could help improve the efficiency of your business and boost your revenue. This is because cash flow is improved by the buyer's bank guaranteeing payment, and the importer knowing the goods will be shipped. In other words, trade finance ensures fewer delays in payments and in shipments, allowing both importers and exporters to run their businesses and plan their cash flow more efficiently.
Trade finance helps reduce the risks associated with global trade by introducing a third party to transactions to remove, or at least rieduce, payment and supply risks. International trade – despite how it might feel from the consumer perspective – is a risky business. All sorts of external factors can delay a shipment arriving on time, for example. These include factors with natural, political, regulatory, and economic roots.
Trade finance is used to protect against international trade's unique and inherent risks, such as currency fluctuations, political instability, issues of non-payment, or the creditworthiness of one of the parties involved.
A small business wants to import its first private label cosmetic product from overseas. To do his it uses trade finance UK. The trade deal is made with the involvement of a bank as a third party and trade financer. The two companies use a letter of credit and a bank guarantee. The exporter doesn’t need to worry that the importer could default in payment, and the importer can be sure that all the goods ordered have been sent by the exporter, because it has been verified by the trade financier.
iwoca provides a type of trade finance through its unsecured business loan, which can be used to boost for working capital and help small business owners fund their import needs. Because it's an unsecured product, with no strings attached, an iwoca loan can be used for whatever purpose you’d like – including financing trade.
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