One of the issues that arises when you are involved in international trade is the difficult involved in verifying that the goods are on the way. On top of that, you wind up with issues related to risk events. Earthquakes, typhoons, tsunamis, and political upheaval can all put products at risk.
International trade is financed through a number of instruments designed to help exporters (sellers) and importers (buyers) complete transactions on trust. Many of these transactions are completed with the help of banks that have special divisions dealing with international trade finance. There are even banks that specifically handle these types of transactions.
Forms of International Trade Finance
When you are trying to decide which corporate banking services to use, it helps to understand which methods the bank in question uses. Many banks offer several different options to help you with your trade finance. Here are some of the forms of international trade finance you might see:
- Letter of credit: In order to show that the importer is serious, the buyer’s bank can issue a letter of credit stating that payment will be made based on certain documents, such as a bill of lading. This contract, with the importer’s letter of credit prominent, can provide a basis for encouraging the exporter’s bank to advance the seller the funds needed to prepare the product and complete the transaction.
- Documentary collection: In international trade, many products are required to go through customs. An importer needs to show certain documents (such as certificate of origin, or bill of lading) to receive the items. However, those documents are normally in the possession of the exporter to begin. A contract can be set up so that the documents are held securely until payment is made. Then, once the exporter receives payment, the importer receives the documents.
- Forfait: This is a process by which receivables are purchased from the exporter by a third party, called a forfaiter. This forfaiter takes on all the risks involved in the transaction (default, non-payment, loss of the receivables to weather or theft, etc.), and receives a margin on the side.
International trade finance includes other options, including export factoring. Additionally, it’s possible to purchase trade credit insurance in order to protect against loss default, bankruptcy, and insolvency. It’s also possible to purchase forms of risk insurance to protect against currency issues and political unrest, which can result in a foreign buyer being unable to make payment as agreed.
The main key here is that a bank can help with these transactions. Most of the time, international trade requires a certain level of trust. Getting a reputable bank involved can mean that you know you will receive the funds as a seller, and the buyer knows that a trusted third party is ready to release documentation and other necessary items as soon as that payment is made.
International trade is part of what makes our global economy work, and it provides many opportunities for business owners. However, you need a good financial institution that can help you navigate the risks, and do what you can to reduce them.