How International Trade Finance Works For Exporters and Importers

Global Trade Finance enables exporters and importers to get fast access to finance to get products manufactured and shipped Internationally.

Throughout the history of business, international trade finance has consistently been a central figure, serving as the foundation for worldwide trade activities. In earlier times, when merchants and businesspeople aimed to broaden their reach beyond their immediate regions, they faced hurdles like establishing trust and managing the risks of trading over vast distances. To address these challenges, trade finance was introduced, providing tools and strategies that guaranteed safety and assurance for all parties involved in a deal.

Now, looking at our modern era, the world of trade finance has experienced profound changes, primarily driven by technological innovations. Cutting-edge digital platforms and fintech solutions lead this transformative journey, equipping businesses with more streamlined, transparent, and secure methods to oversee their global financial activities. With advancements ranging from blockchain technology to analytics powered by artificial intelligence, today’s tools are redefining the essence of international trade finance, making it more user-friendly and efficient. 

Think of trade finance as a helping hand for businesses that deal with international buying and selling. Let’s take a simple example. Imagine you’re a shop owner who buys products from another country. You might need to spend $100,000 for an order. Traditionally you’ll have to pay a deposit to start production. Then pay the balance before the goods are shipped.

This means you can be waiting months from your first payment until you get your products. And remember, once those products arrive, you still need to sell them in order to retrieve your original investment and make some profit. This long wait can be hard for many businesses, especially if they don’t have liquidity available. Trade finance can help finance an order, giving the buyer cash flow as they wait for the goods. In short, trade finance doesn’t just make international transactions easier; it also helps businesses grow without money worries.

Trade Finance leverages various financial instruments to make the requisite finance available to importers and exporters or buyers and sellers to conduct global trade.  The World Trade Organization estimates that 80% – 90% of world trade relies on some form of Trade Financing and most of it is for a short-term tenure.

In a note in August 2020, the World Bank estimated that the Trade Financing gap globally stood at USD 3.4 trillion covering all the available forms of Trade Financing. In 2018, as per ICC and ADB Global Survey 2018, this gap stood at USD 1.6 trillion.

Import Export Finance is often required as importers usually place new orders for high value bulk shipments that require an upfront cost to manufacture.  There is considerable risk to assess when producing a high volume of products.  Cashflow and working capital management are fundamental for exporters, importers and trading companies.

The main benefit of having a suitable import export finance solution is that it will provide the seller or buyer with upfront finance to make deposit or balance payments for the goods to be manufactured and shipped.  Different trade finance options usually provide finance on 30-120 day terms.

Using Export Trade finance, sellers do not have to dilute equity to allow their business to grow.  It allows exporters and importers to remain working capital positive, to focus on optimizing operations & growth and expand into new markets.

Receiving finance up front hedges and reduces the risks of financial defaults.  It also enhances the speed of confirming new deals and reduces the time between manufacturing and loading goods on board vessels for export.

When exporters and importers connect to confirm new deals, Proforma Invoices or Sales Contracts can be paid using different International payment methods, depending on what has been agreed between the exporter and importer.  Both buyer and seller must clearly understand the Incoterm® that is agreed in the Proforma Invoice or Sales Contract.

By working with banks or financial institutions in the country of export and country of import, various trade and export finance facilities can de-risk invoices or contracts between the seller and the buyer by guaranteeing payment to the seller to enable them to do business with overseas counterparts.

Import Export finance includes various mechanisms such as:

• Letters of Credit
• Factoring
• Invoice discounting
• Export invoice finance
• Bank guarantees
• Overdraft facilities
• Inventory
• Mid and long term loans

Banks and financial institutions can also provide other bespoke solutions such as foreign exchange products to mitigate risks of adverse currency movements.

Export finance can include forms of insurance to protect the seller if the buyer goes default, or a form of bond or guarantee (a deposit to show to a buyer that an exporter is financially able to produce and deliver the goods on the agreed terms).

There are hundreds of International Trade finance companies.  These include companies such as Corporate & Commercial Banks, Alternative Finance Providers & Non-Bank Lenders, Development Finance Institutions (DFIs) and Export Credit Agencies (ECAs).  These companies specialize in providing bespoke trade finance to exporters and importers in almost all industries.

Depending on the type of facility that you need, providers will need to get an understanding of your business and your import export operations.  Generally, if you already have a history of dealing with companies Internationally, it can make the approval process easier.

Company Background Details:

• Legal Company Name
• Certificate of Business Registration
• Information on any related companies
• Business Registration Number
• Registered office address
• Details of Director(s)
• Contact Details

Details of Import Export Operations:

• Financial details such as Profit & Loss Statement, Balance Sheet, Cash Flow Statement.  In some cases management accounts, creditors, ledger, debtors ledger and stock ledger
• Budgets and forecasts
• Overview of the industries that you operate in
• Competitor landscape
• Types of products that you sell
• Types of International clients and countries that you do business with
• Details of your trading history with International partners
• Current Invoices or Purchase Orders

It’s important to note that businesses applying for trade finance should negotiate the most favourable terms, including interest rates, fixed charges, fees and non-interest related costs.  Once satisfied you can move forward with signing legal documentation.

In order to receive finance for a particular trade, it’s imperative that both the exporter and the importer provide clear, correct documentation.  Proforma Invoices, Sales Contracts and Purchase Orders must clearly state all information on the parties involved, the types of products to be sold, the Incoterm® agreed, the type of products to be sold, and any other contractual information.

Read how companies use IncoDocs to create clear, correct Proforma Invoices, Sales Contracts and Purchase Order documentation.

As global trade moves into the digital world, import export finance will become more accessible to more parties, and the process will be streamlined to become a completely online paperless process.

We are already seeing technologies such as Optical Character Recognition (OCR), Blockchain, Electronic Bills of Lading (eB/L), Machine Learning (ML), Artificial Intelligence (AI) and advanced integrations being applied to many industries around the world to automate previously paper heavy processes.

When these technologies are applied to the invoices and export documentation paperwork involved in the global trade process, it will significantly reduce or eliminate manual processes, avoid errors, reduce administration costs and provide completely online, automated processes.

A digital documentation process will provide companies with a detailed history of their global trade, to provide historical trading information to make trade finance a fast and easy process.  Big Data will empower supply chain communities with greater collaborative capability.

At its core, trade finance aims to create a bridge for exporters and importers. It offers specialized financial tools and services that reduce the inherent risks in global trade. This framework ensures that exporters are compensated for their products and services, while importers obtain the goods based on the terms agreed upon.

What influence do digital platforms have on the trade finance world? 

The advent of digital platforms has revolutionized trade finance by enhancing its efficiency, clarity, and security. These platforms provide solutions that automate tasks, track activities in real-time, and minimize manual paperwork, thus speeding up the entire process. What’s more, these digital avenues have democratized access, allowing even small to medium-sized businesses to tap into trade finance solutions that were once exclusive to major corporations.

Absolutely, as with any financial endeavor, trade financing is not without its risks. These risks span from commercial concerns, such as not receiving ordered goods, to geopolitical issues like political upheavals or sudden regulatory shifts in a country. There’s also the potential for currency value changes that can impact transactions. However, the beauty of trade finance lies in its array of instruments crafted to counteract these risks.

Identifying the optimal trade finance solution is a nuanced process that hinges on a company’s unique requirements and risk tolerance. Elements to ponder include the specifics of the deal, the rapport with the trading counterpart, the socio-economic climate of the partner’s nation, and the financial implications. Engaging with seasoned financial professionals or institutions that specialize in trade finance can offer invaluable insights.

Banks hold a pivotal position in the sphere of international trade finance. They furnish a plethora of financial tools, including but not limited to letters of credit, documentary collections, and bank guarantees. Acting as trust-building intermediaries, banks facilitate smoother transactions by offering products tailored to minimize the potential risks in global trade deals.

Indeed, the regulatory landscape for trade finance can exhibit stark differences across nations, influenced by their individual economic strategies, banking norms, and international trade pacts. While some nations might enforce rigorous rules to safeguard their local industries, others might lean towards a more open stance to promote international commerce. For businesses, it’s imperative to stay informed and adhere to the regulatory frameworks of both their homeland and their trade partner’s territory.