Why Banks Are Essential in International Trade
While most people associate international trade with freight forwarders, carriers, and suppliers, banks also play a very important role. Here's how.
When it comes to international trade, the most well-known players are freight forwarders, carriers, suppliers, and customers. However, the general public is frequently unaware of the role of banks. Nonetheless, as this article shows, they are important players in international trade.
Securing and Pre-financing Transactions
In the execution of an international sales contract between two players located in two different countries, trust is a key element. This trust is sometimes called into question due to doubt concerning a party to the contract, and this can jeopardize the transactions. This is an important issue. Moreover, some companies may not have the financial resources to bear all the costs related to an export or import operation. For example, an SME may receive a large order that its cash flow cannot allow it to bear in the event of payment on credit. This can also be an issue.
To overcome these two problems, banks are the essential allies of companies involved in international trade. Through documentary payments (documentary remittance and documentary credit), they secure transactions because they verify the authenticity and conformity of documents on behalf of their client. They also pre-finance the export or import operation by paying the supplier in advance on behalf of the customer or by advancing the funds until the customer settles the transaction on the agreed due date. The supplier does not have to wait before being paid and the customer does not have to pay his or her debt immediately.
Encouraging Foreign Direct Investments
There are several uncertainties that can dampen a company's enthusiasm for internationalization. Companies must sometimes invest a significant amount of money in prospecting several foreign markets at the same time through field studies to ensure that all of the lights are green before establishing themselves abroad. Companies must also develop new products for new markets or adapt existing products.
These two steps require huge financial resources that companies are reluctant to invest because they may be lost in the event of insufficient business results. In this specific context, some investment banks specializing in export financing offer tailor-made services to enable SMEs to prospect without having to worry about the resources they could lose if the prospecting were ever unsuccessful and also be able to finance the research and development necessary to adapt the offer to the new market.
Banks also play several other roles, including credit granting and investment management. However, the role of banks in foreign trade can be even more improved since there are few banks specializing in foreign trade and ready to provide importers and exporters with tailor-made solutions. Until then, it is the so-called classic banks that are trying to fill this gap, but more suitable offers will be needed because international trade has its own specificities that need to be considered.
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