Nations trade goods and services around the world to obtain what they cannot produce for themselves.
International trade is a key factor in the prosperity of economies around the world. Common financing methods that help facilitate trade between buyers and sellers across international borders include working capital financing, cash advances, and open accounts. Each of these methods uses a variety of trade finance products that are available to exporters to increase cash flow and reduce the risk associated with shipping products abroad.
Exporters use different methods to finance international trade, depending on the resources they have and the transactional risk they are capable of absorbing. The ability to access international markets is an important strategic opportunity for manufacturers and sellers because it exponentially expands a company’s customer base. However, international trade is much more complicated than doing domestic sales and comes with internal and external stressors that often determine whether a company can operate effectively on a global scale.
The method an exporter uses to finance international trade depends on these stress factors. A company can only export goods if it can manufacture them and expect payment at some point in the future, when the goods are delivered or sold at the importer’s destination. Furthermore, a company can only enter the export business if it finds a way to absorb or bear the external risk of non-payment. The exporter may extend credit to the importer in the hope that payment will be made on delivery as agreed, or may require payment in cash, transferring the risk to the importer. Unfortunately, an exporter that requires importers to pay in advance may not be as competitive in the international market as an exporter that can expect payment.
To deal with the internal strains of international trade financing at the manufacturing and cash flow levels, an exporter can use various types of working capital financing. This method of financing uses loans and guarantees from government programs designed to support exports, specialized programs from international trade associations, and export credit insurance offered by liability companies. The financing of working capital impacts the exporter in the pre-shipment phase and allows him to participate in international markets in a limited way, stabilizing the cash flow and guaranteeing the performance of the importer.
The international trade finance prepayment method requires the importer to pay for their orders in advance. This removes transaction risk from the exporter, but also makes it more difficult for the exporter to compete in the market. Electronic payment methods, such as the use of credit cards and bank transfers for payment, are distinctive features of this method.
The use of open account terms is the international trade financing method that has the most significant participation of banks and financial services companies. The financing options under this method mainly impact the phase after the transaction is sent. Letters of credit, a method of debt reduction called forfaiting, factoring, and document collection, are included in this method.