What is trade finance?

Trade financing is the process by which the exporter gets paid for the shipment of the goods, and the buyer pays later.

Basic Principles of trade financing:

Trade financing has operated on this basis for years. The exporter confirms the products and their shipment. This is done by putting forward a set of documents like bill of lading, packing lists, inspection reports or certificates. Payment is made on the foundation of the documents and before the goods coming to the buyer. Moreover, the buyer cannot receive the goods without the documents. If the payment does not come, the control of the goods remains in the hands of the exporter. Therefore, it is also called a documentary credit.

Let us now discuss the importance of trade financing:

Most traders take loans from banks to sponsor the goods that are to be shipped. Trade finance helps the trader to get paid before the delivery of exports. It saves them from financial troubles before shipment.

It increases supply chain efficiency by offering money to the traders before the shipment of goods. It also leads to a reduction in cost incurred for the supplier and thereby the price of the product.

When the payment is made after the delivery of the goods, the supplier has to wait for days to receive the payment, and his interest keeps piling up from the financial institution. Late payment of dues can also lead to the blocking of credit lines. 

The biggest issue resolved by trade finance is that the suppliers do not need to take extra credits or loans other than pre-shipment finance from banks and financial institutes. Suppliers need to be paid off before delivery so that they can cover their pre-shipment finance, which is made possible by trade financing.

Managing the gap collateral is another hectic task. The local bank of the foreign country might not understand the supplier’s problem and block his credit. Trade financing prevents this problem as it manages to break the collateral gap.

Trade financing closes the working capital gap. It allows more working capital to the suppliers by offering them payment before good delivery.

It gives the suppliers the power to invest more. When more capital is given to the suppliers, they can invest and supply more. They also have reduced liability from the banks, and the interest amount also goes down significantly.  

It adds flexibility, security, convenience and flow to the transaction. The money is available to the supplier in their local currency, and trade financing requires lesser documentation than banks or financial institutions. The contracts are straightforward and pretty simple to understand. It allows hassle-free transaction from one country to another.

The funds are available instantly in most cases which leads to an improvement in the transaction flow. Trade financing credit does not need to be considered as debt in books of account. They are recorded as working capital instead. Suppliers will not have to pay a lump sum of money to keep their inventory or supply.

The importance of trade finance is unmeasurable. Every trader, supplier, dealer and exporter must have significant knowledge in the field of trade financing and should also practice it as much as possible. Trade financing keeps the export, import and foreign market working smoothly and plays a key role in the cash flow of the suppliers and the traders.

Published By Pranesh Balaji

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