What are the benefits of trade finance for importers and exporters?
Trade finance has many advantages for firms that import and export. By providing a stream of working capital it enables businesses in both fields to manage their day-to-day running costs. Trade finance can allow an importer to buy stock in bulk up-front, and an exporter to buy more inventory to sell. More working capital and a well-managed cash flow aids the growth of a business, allowing it to fulfil larger transactions that normally wouldn’t be possible. This can, in turn, potentially increase profit margins.
Since importers are obliged to pay for goods before they are shipped, the importer requires liquidity to pay the exporter’s invoice, as well as security that the goods will arrive. The importer’s bank can help by providing a letter of credit to the exporter, which provides working capital for the importer and mitigates their risk. An exporter’s bank lends money on the basis of an export contract.
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What is trade finance and can it mitigate risk?
Trade finance makes it easier to buy and sell across borders. It’s a broad set of financial tools that meet the needs of importers and exporters of both finished goods and raw materials. The World Trade Organization (WTO) estimates that 80 to 90% of global trade relies on trade finance. Letters of credit, bills of exchange and loans are all elements of this type of finance.
What they have in common is that they are all concerned with ensuring businesses have access to working capital when they need it. Trade finance facilities act as safety nets, offering a degree of protection to buyers and sellers in an international marketplace. They assist in the fulfilment of transactions that may involve several currencies and multiple stakeholders.
More specifically, trade credit, political risk insurance and credit insurance are products that temper commercial risks which arise from conflict and instability. Credit insurance helps recover all or part of a receivable, while political risk insurance protects businesses that purchase from potentially unstable regions.
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