Trade finance is the collection of financial instruments and products offered by banking and financial institutions to assist international trade and commerce. These financial instruments and solutions assist importers and exporters in carrying out business transactions without experiencing financial difficulties. It bridges the gap between importers and exporters by introducing a third party and covers products and services ranging from letters of credit to guarantees, supply chain financing, factoring, export and import finance, and so on.
The key parties involved in international trade finance include:
1. Importers and exporters
2. Banks
3. Financial institutions
4. Insurers
5. Shipping & logistics providers
6. Government agencies
Some international trade finance products
Trade finance is not like traditional financing or credit issuance in its nature or aim. General financing, for example, is often used to manage solvency or liquidity, whereas trade financing can shield buyers and sellers from global trade hazards.
Here are some of the main types of trade finance instruments:
- Letters of credit: A letter of credit is a proof of funds provided by a banking or financial institutions on behalf of the purchasers, assuring that the sellers will receive full payment for their delivered goods and services on time. If the buyers are unable to do so, the bank will pay the seller in part or in full, in accordance with the terms and conditions of the issued letter of credit.
- Bank guarantees: It is also issued by a bank, which acts as a guarantor in the event that the importer or exporter fails to meet the contract’s terms and conditions.
- Factoring: When businesses are paid based on a percentage of their receivables. The exporter sells their invoices at a discount to the trade financier. The factor then sells it to the importer and receives the product’s total price.
- Export credit: This can be delivered as working capital to exporters. Once the buyer’s payment is received, the export packaging credit can be changed and the loan against the order closed.
- Forfaiting: In exchange for cash, the exporter sells all of their accounts at a discount to a forfeiture buyer.
- Supply chain finance: Portfolio of financial services and products addressing the various working capital requirements of an anchor corporates suppliers and buyers
Understanding the basics of international trade financing
Buyers in international trade transactions do not want their money tied to a shipment of goods that may take several weeks to arrive from an overseas manufacturer. However, exporters that send out large quantities of goods cannot afford to wait until their shipment arrives before receiving money. As a result, more than 80% of global trade relies on some type of international trade finance to facilitate transactions.
Trade financing financial institutions function as mediators between importers and exporters, providing financial help for business transactions between the two sides. These transactions can occur both domestically and abroad.
Trade finance companies manage a wide range of import and export activities. These activities may include the issuance of a letter of credit, a guarantee, trade finance, and factoring, among others. Multiple parties are involved in the process, including the importer and exporter, the trade financer, the export credit agencies, and any insurance involved.
Factoring in trade finance is a common approach used by exporters to boost the pace of their cash flow. Under this agreement, the exporter offers open invoices to a trade financer at a reduced rate of cash flow. The trade financer, or factor, buys the receivables, gives the exporter cash up front, and collects payment from the importer when the invoice matures. Factoring reduces the exporter’s exposure to potential bad debts. It also gives them working cash, which they may employ to keep their firm running efficiently rather than waiting for payments.
How trade finance helps minimise risk
Trade financing is critical to ensuring that shipments are carried out and paid for in a timely manner.
Exporters may never know whether or not an importer will pay them for their purchased goods if trade finance is not available. At the same time, importers are hesitant to purchase a product because there is no guarantee that the vendor will ship their goods.
Trade financing services help to mitigate these risks by enhancing the speed with which payments are made to exporters and ensuring that all commodities are transferred to importers. Furthermore, organisations that offer non-recourse finance will continue to pay their clients even if the buyer defaults due to buyer insolvency.
How international trade finance helps your business
Trade finance can help mitigate the risks associated with international trade by bridging the gap between buyers and sellers and securing the finances needed to purchase the goods. Without a doubt, an exporter requires an importer to pay in advance for an export shipment in order to prevent the risks of nonpayment or refusal of payment for the goods. The ideal answer to this difficulty is to produce the shipment documentation as evidence of funds to the exporter’s bank. It ensures that the vendor will receive full payment if the buyer fails to do so.
Other benefits of international trade finance
It assists various companies in obtaining funding to facilitate their international trade dealings. In the case of factoring, corporations can receive cash payments depending on their accounts receivables, or they can consider letters of credit.
- It allows businesses to enhance or expand their global business and create money through trade
- It helps businesses decrease the dangers of financial nonpayment.
- It also aids in strengthening the relationship between buyers and sellers.
Buyers can request more stock or place larger orders with providers.
How to apply for international trade finance facility
Companies that provide international trade financing include corporate and commercial banks, alternative finance providers, non-bank lenders, Development Finance Institutions (DFIs), Export Credit Agencies (ECAs), fintech firms, and trade finance firms. These firms offer trade finance to exporters and importers in practically every industry.
Trade financing providers will need to understand your business and your import-export operations, depending on the type of facility you require. In general, if you have prior experience interacting with multinational companies, it might make the approval process easier.
Impact of technology on international trade finance
Access to import-export finance is becoming considerably more viable for more and more parties as global trade gradually transitions into the digital realm. This, in turn, streamlines it and transitions it to a completely paperless approach.
As a result, several technologies, such as optical character recognition (OCR), blockchain, electronic bills of lading (eB/L), machine learning (ML), and artificial intelligence (AI), to mention a few, have already entered the market. These technologies have eliminated paper-intensive procedures by enabling enhanced system integrations that can be easily implemented in a variety of sectors around the world.
With the implementation of these technologies, invoicing and export documentation as part of the global commerce process considerably aid in the elimination of manual processes while minimising errors and administrative costs. All of this occurs through completely automated processes.
The digitalization of documents gives a full global trade history, which can provide insights into organisations’ previous trading information, facilitating a faster and easier process of financing trade. Furthermore, the release and availability of such a massive amount of data will benefit supply chain communities by improving their collaborative potential.
Import & export finance through M1 NXT
M1xchange has established the M1 NXT, a digital cross-border platform for border trade finance. This digital platform is regulated by the International Financial Services Centres Authority (IFSCA), and its objective is to facilitate and, in some cases, enable international trade finance. International export and import factoring solutions are part of the platform’s first phase.
Exporters, importers, import and export factors, financiers, and insurance companies are some of the key participants in international trade transactions, but they are not the only ones. These participants will be registered on the platform upon onboarding.
Why you should choose M1 NXT
Some advantages of international factoring for exporters using the M1 NXT platform include:
- It streamlines and simplifies the digital working capital management process, all while maintaining competitive pricing.
- It also provides non-collateralised finance with no recourse.
- It facilitates off-balance-sheet funding.
- There is only one-time documentation.
- It improves global bank liquidity by establishing partnerships between financiers and partners.
- It provides risk protection, thereby increasing business volume and extending payment terms to purchasers.
- It converts receivables into cash upon shipment, giving firms an extra source of finance.
Bottom line
It saves money on procurement and finance and is not a loan. Furthermore, it provides a digital platform that makes your journey completely seamless while lowering transaction and administrative costs.