Four Things You Need to Know about Banks and Exporting
Banks play an important role in a company's decision to export, facilitating international trade significantly. Here are four different ways that banks can influence exporting.
The link between banks and exporting may not be obvious, but both commercial and investment banks can facilitate trade, particularly international trade. Banks often play a key role in a company’s decision to export, whether they are aware of this or not. Let’s look at four ways in which banks influence exporting:
Access to Finance Impacts the Likelihood of Export
Studies have shown that financially constrained firms are less likely to engage in exporting. Small and medium-sized enterprises (SMEs) are especially impacted by the lack of access to funds when it comes to trade. In fact, one study has found that access to finance can improve the likeliness that an SME will export.
Access to cash is a major driver of export; businesses without funds cannot cover the initial costs of setting up trade, which is why banks are important trade mobilizers. Both investment and commercial banks can provide capital to global and local businesses.
Start-ups, in particular, can struggle to access international markets. New exporters face high start-up costs due to the requirement to conduct market research in their prospective territories, adapt their products to these new markets, and navigate new bureaucratic procedures. Without access to finance, many promising start-ups may never begin exporting, which may stunt their growth and long-term success.
Banks Promote Business Growth
Banks can also encourage a business’s financial development and promote growth, both of which are factors in facilitating trade. Businesses are more likely to export when they are growing and have financial stability. Banks can support companies to help them achieve this status. Often, companies thriving in their own country will look to expand internationally. By promoting growth to allow a company to gain a strong foothold in their own territory, banks play a key role in the decision businesses make to expand internationally.
Banks Reduce Payment Risk with Trade Financing
Many decades ago, exporters faced the risk of selling goods to international buyers and not receiving payment. Similarly, importers faced the opposite risk, facing the possibility of paying for goods that they might not receive. This risk prevented trade. Some businesses believed the risk outweighed the benefit of exporting.
Over the years, trade finance has been developed to overcome this risk and facilitate exports. Trade finance works by accelerating payments to exporters and reassuring buyers that imports have shipped and are making their way. An importer’s bank can provide the exporter’s bank with a letter of credit as assurance that payment will be made once the shipment has been received. A bank may alternatively provide an exporter with a loan to increase their liquidity while they await payments from importers to arrive.
Today, trade finance is very important for establishing trust between exporters and importers which is vital to maintain high levels of international trade.
By Stimulating Exports, Banks Influence Global Economies
Exports are vital for stimulating economies. They offer businesses a wider customer base for their products, thus propelling growth and development. Without banks, fewer companies would engage in exports. Banks, therefore, are an essential component of global trade.
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