Not many people are familiar with the term ‘trade finance’, and that’s quite normal – it does involve a lot of dealings, and is in fact an umbrella term that includes so many things and aspects. But make no mistake: trade finance is of great importance and it’s sad that so few people understand what effect it has on their business.
Trade finance is also termed ‘export finance’, although it isn’t only limited to financial transactions made by export companies. It involves international as well as national dealings. It’s about lending, credit, invoices, and insurance, and more. But what exactly does the term mean? And why should it matter to you? Here some quick facts about trade finance and why it is important for your business.
What is trade financing?
Imagine you have just received a large order – that’s good news for you. The problem is that you may need to order some raw materials from a company abroad to fulfill that order – and this will cost you money, because often, your suppliers will demand a large amount up front, and this can hinder your cashflow. There is help to be found, though: thanks to trade finance, your suppliers can get paid by a lender, and the lender then collects from your customer. The lender takes a fee or commission and forwards you the remainder.
Why is it important?
This organisation allows small and medium enterprises to do business even if they don’t have the adequate funds to undertake such a project; it takes money to make money, and when the cashflow is limited, getting large orders may seem next to impossible. However, thanks to trade financing, even a small business can receive an order, contact the supplier, and go about business without having to get a loan to pay the supplier. There’s a financial backer, and especially for international trade, this is a great support.
How can you benefit from it?
Trade finance (or export finance) has helped many – from underdeveloped nations to governments and small or medium-sized private enterprises. Trade finance is provided by independent private institutions that understand your business and have your best interests in mind. Brokers help facilitate this process.
It’s also important to understand that there are certain challenges involved; banks are becoming more and more technology-driven, which means they often rely on algorithms and statistics more than common sense and community-oriented service. This means they tend to offer loans to larger companies more, rather than SMEs. For them, it’s a matter of risk avoidance. Trade financing aims to solve these problems and overcome these challenges. It’s a positive thing – it opens opportunities for small and medium enterprises all over the globe.
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