What Is Trade Finance & How Can Your Business Benefit From It

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There is no denying that today’s economy is incredibly globalized. While this fact opens up countless possibilities for companies of all scales and sizes, we have recently also gotten an opportunity to see how health crises and political turmoil on one end of the world can throw the global economy and supply chains off the rails on the other.

Of course, in a situation like this, companies are looking for solutions that should make the global logistics and trade of goods much smoother, and some of the already present solutions are gaining new prominence.

Trade financing is one of the mentions that very frequently pop up in such conversations.

Let us take a look then at what this term actually describes and how your company can benefit from leveraging some of its benefits.

What is trade financing?

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If we would look for the simplest explanation for this term, we would probably find the explanation that trade financing represents a sort of loan that provides one company with the credit needed for seamless international trade. In reality, though, things are a bit more complicated.

For instance, in most cases, the company acting as a seller will require the importer to prepay before the goods are shipped. The buyer, on the other hand, may try to reduce the risk of global trade by asking the seller to provide assurance that the goods have been shipped.

Trade financing serves as a third party that can bridge this gap by providing an exporter with a letter of credit upon receiving certain documents like for instance bill of lading. In other cases, trade financing may give the buyer access to remote foreign markets by providing loans covering the shipping cost difference. In any of these cases, though, this form of mitigation speeds up the trading and provides a guarantee to all parties involved that the transaction will be completed without any delays.

The benefits of trade financing

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Business flexibility

As we mentioned earlier, the modern business world is hasty and unpredictable – when the opportunity for some favorable transaction arises, the companies need to close without any delays or they miss the chance to capitalize. That is why any company interested in global trading should reach out to Trade Finance service providers and explore the available financing options so when the opportunity finally kicks in they can start making deals ASAP.

That lends them a level of flexibility needed for global trading.

Stable cash flow

Maintaining a steady cash flow is one of the most important aspects of running a company.

With that in mind, any eventual delays, bottlenecks, inability to deliver the goods and charge the invoices in time can bring one company to a grinding halt. Trade Financing makes sure that is not the case. Assurance that the goods will be delivered in time allows traders to keep their businesses running and close the deals with their clients even though they still don’t have the required goods physically present at their stores.

Higher level of convenience

The number of processes involved in running a company can put a heavy strain on its resources. That is why all things that can be streamlined should, by all means, be streamlined. Trade financing leans into the story quite heavily. Namely, the approval process for trade financing loans is much faster and asks for far less paperwork than traditional bank loans. That is why, when the situation asks for, businesses that eventually opt for trade financing get access to the funds with the optimal level of convenience.

Avoiding overpay costs

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Due to its uncertainty, international trading usually works within some acceptable loose boundaries, so overpays are not considered an exception but rather standard practice.

When piled up, however, these costs can present a considerable financial burden for one company. Since trade financing is made for the exact value of the cargo and the shipping costs and the safety is guaranteed, overpay expenses are cut in their very roots. This gives companies more leeway with the order volumes and brands they opt for.

Guaranteed security

Last but not least, we would like to point out that the global trading market can leave small and medium businesses feeling out of their depth. In some cases, this lack of experience and the sense of the market scope can completely disrupt their prospects of expansion.

Here lies one of the greatest advantages of trade financing services – by acting as a third-party mediator that backs up and guarantees all financial aspects of foreign trading they can help smaller companies enter the arena with the necessary confidence.

We hope this short breakdown gives you a more in-depth look into what trade financing actually is and how this type of loan can help your company acquire a greater level of agility, nimbleness, and efficiency in global trade. As we had an opportunity to see in recent years, global trading is an equation with too many unknowns. Trade financing brings a much-needed sense of certainty in the circumstances when it’s needed the most.