The Advantages of Using Trade Finance
The collateral obligations, repayment terms and risk thresholds of conventional lenders can make finance difficult to access for firms looking to begin or expand international trade ventures.
Trade finance enables firms to undertake such ventures, generating revenue growth and securing higher profits for firms operating in various industries.
Moreover, by providing trade-specific financial products overseen by industry expertise, trade financiers help firms overcome the challenges inherent in international trade. In doing so, trade finance offers three major advantages to these firms.
Investing for growth
First, trade finance gives firms the best possible opportunity to realise profits from investment in international trade. As a form of loan, trade finance provides investment into businesses without requiring their owners to offer new investors equity, maintaining their independence and control.
Instead, trade financiers use their experience of international trade to assess the profitability of each proposed venture and lend based on a clear assessment of operational risk. This enables them to offer firms’ access to finance without the creative constrictions of equity financing or the extensive collateral obligations used to secure conventional loans, such as property or investments.
As such, trade finance represents a flexible means for firms to capitalise on opportunities they know exist in their market without constricting their cash flow. Moreover, firms with access to trade finance can make secure payments in full up front, empowering them to negotiate better terms with suppliers and therefore yielding greater profit from potential investments.
Supporting firms’ needs
Second, trade finance products are designed to support firms as they undertake international trade ventures by assisting their dealings with suppliers and other logistics, processing, transportation and regulatory stakeholders.
By establishing direct credit lines between financiers and importers, trade finance can offer firms the flexible access to credit required to fulfil the transactions implicit in international trades, and payment solutions to monitor their credit and track payments online.
These trade finance products are intentionally flexible to reflect the complexities created by conducting business across international borders. Trade financiers’ global footprint enables them to provide a credit facility for paying suppliers from anywhere in the world.
Most provide a surfeit of options for paying in different currencies, which can unlock significant discounts from suppliers for firms trading internationally whilst limiting the risks to them associated with fluctuating exchange rates.
Moreover, lengthened terms of repayment support importers constricted by cash flow issues to negotiate competitive terms and quantities with suppliers, ship their receivables and realise profit on that investment through sales before they repay financiers.
In doing so, these products enable firms engaged in international trade to fully meet their financing needs, from managing large orders during seasons of peak demand for cyclical imports to financing expansions into new markets or products.
Underpinning international trade flows
Thirdly, once the investment is identified, the finance agreed and payments made, trade financiers can monitor and control international trade ventures to secure the investment and execute the trade. Specifically, trade financiers offer suppliers the financial security of guarantees on payments by providing them with undertakings of payments, whilst confirming to buyers that orders have been fulfilled and shipped by requiring bills of lading from suppliers.
When the buyer receives the goods and confirms the quality, trade financiers can immediately pay sellers whilst buyers recoup their investment through sales. This offers both sellers and buyers reassurance that their transaction will be secure.
In addition, having an experienced third party facilitating such trades reduces errors and enhances security, as trade financiers monitor processing and transportation links in supply chains and record and scrutinise all payments and transactions.
From pipeline to profit
Trade finance’s unique terms and products can turn opportunities in firms’ prospective pipelines into tangible ventures realising profits despite the constrictions on their cash flow caused by lengthy international trade cycles.
By supporting firms as they conduct their transactions and monitoring the receivables on their journey through the supply chain, trade finance can underpin the expansion of profitable international trade flows and grow international businesses without the complex and constricting requirements of equity financing.
Invest in your business by exploring how trade finance can support new ventures today.
This article is part of an introductory series about trade finance, the ways trade finance can be structured, and the products underpinning import and export transactions.
Article by: James Dinsdale, Writer at Trade Finance Global