How to Simplify the World of Trade Finance

Photo by Ahmad Ardity. Licensed under Creative Commons CC0.

While the world of business may be constantly evolving, the concept of trade finance has remained frustratingly consistent. The practicalities of trade finance also make it deceptively complex, making it hard for small business-owners to fully embrace it and drive their ventures forward.

With this in mind, here are some ways in which trade financing can be simplified before being delivered to clients:

The Letter of Credit

Most SMEs will be familiar with the letter of credit concept, which banks issue on behalf of applicants so that they fund a specific purchase. It is most commonly used by businesses when they are looking to import stock from a supplier, as the letter of credit serves as an undertaking from a financial lender that they will provide funds against the value of the order. So, once the goods have been shipped and the exporter has provided the necessary documentation, the bank will make the payment in full and settle the debt.

To secure this, you will usually need to have to present the bank with a confirmed order from a retailer or partner, as this provides security in instances where this is an issue with the supplier in question.

A Bank Guarantee

Securing a bank guarantee is far less common in the modern age, with fewer financial institutions likely to provide such a service since the Great Recession.

Essentially, it is an undertaking that the bank makes on behalf of a small business-owner, guaranteeing that they will fulfil a specific debt if the applicant is unable to meet his financial obligations. Using the same example as before, this method would see businesses secure a guarantee from the bank to the value of a predetermined stock order, so that if they failed to pay their debt to a supplier would still be settled.

There are various types of guarantee to suit different needs, from the advanced payment discussed here to tender and performance bonds, retention and the remuneration of labour.

The Collection and Discounting of Bills

As you can see, these options are relatively simple, and the same principle applies to the collection and discounting of bills. This is a major trade service offered by some banks, through which the supplier’s bank collects payment on behalf of their client, sourcing this directly from the businesses’ bank.

Once again, the sum paid will related directly to the value of goods or services, affording you with direct access to the precise level of financing that you require.

Despite its complexities, it cannot be denied that trade financing is actually a relatively simple concept. The key is to understand your options and make the right choice of broker, with suppliers such as Touch Financial offering a wealth of knowledge and expertise that can aid the smooth running of even small businesses.


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