International Trade Finance
Come take a look at our article to learn more about what international trade finance is, why it is important in global trade, and the benefits it provides.
Finance is always involved in trade at some point, but international trade is slightly different. This is because it involves parties who may have never met, are in different jurisdictions, and are usually separated by a significant distance. The differences make international trade difficult, which is where international trade finance comes in.
What Is International Trade Finance?
International trade finance involves a group of financial instruments and products that facilitate international trade and commerce. Financial institutions usually provide international trade instruments to make trade easier for importers and exporters. The financial institution may be a bank, trade finance company, or export credit agency.
The institution comes into the transaction as a trusted third party to ensure that the delivery of goods takes place and payment is made. Trade finance protects the trading parties from risks such as currency fluctuations, issues of non-payment, political instability, and creditworthiness of the trading party. Some of the financial instruments that financial institutions use for international trade include:
- Lines of credit for both parties
- Letters of credit
- Invoice discounting or invoice factoring
- Export credit
- Insurance
The Benefits of International Trade Finance
The primary benefit of international trade finance is that it provides security by guaranteeing buyers' payment and confirming the delivery of goods by suppliers using bills of lading. The service ensures that both parties have protection from risks. Trade finance providers also have experience facilitating international trade, ensuring the transaction is above board, compliant, and secure.
International trade enables a company to increase its sales through exports without bringing in new capital or selling shares. It can be in the form of a loan that allows the business to expand without losing independence or control. It's also more flexible than conventional loans because the company won't have to adhere to extensive collateral obligations; the deal just has to be viable.
Sometimes, a company will receive an order before its invoices are paid. Using invoice discounting or factoring, a company can access funding for immediate expenses and continue to fulfill orders. The company can expand its market share and business volume.
By reducing the risk of doing business and making it more secure, international trade finance enables companies to operate at competitive rates. That will increase their business and improve their profitability.
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