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What is Trade Finance?

Firms that conduct domestic and international trade in goods, services or commodities may experience a financial challenge often referred to as the “financing gap.” Trade finance has been created to help fill that gap so that firms can continue trading without a hitch.

Ultimately, trade finance describes accessible funds that can be used in order to pay suppliers for material and labour at the time during the “trade cycle” when firms have purchased the necessities from their suppliers but have yet to receive their own payment for their goods and services through sales. Instead of being forced to make their suppliers wait until they are able to afford to make payment, trade finance is offered ahead of time and can be paid back to the financier once the firm receives its profits.

The benefits of trade finance

Always conduct plenty of research before deciding whether or not trade finance is the right solution for your business, as well as when determining where to source it. Doing so will help you find a trade finance solution that will make the most sense for your firm, your objectives, and the challenges with which you are currently faced. Click here for more information.

There are three benefits that trade finance affords firms:

  • It makes it possible for a firm to continue operating seamlessly without cashflow restrictions relating to trade cycles. This includes paying suppliers and investing in new ventures.
  • Trade finance can be customised to suit the needs and preferences of each individual firm. It means that firms have access to a convenient and cost-effective credit solution that is easy to manage and can be altered as necessary.
  • When taking on a new venture, firms that have partnered with reputable trade financiers will be able to take advantage of various tools to boost trust and security in an effort to aid in the facilitation of faster international trade transactions.

Where to find trade finance

If a firm decides to make use of trade finance, there will be many different routes to take in order to obtain it. It is important to remember that not all trade finance deals are created equal, and all institutions offering trade finance will be sure to provide a unique product. Ultimately, how much trade finance is provided, along with how much it costs, and the many terms and conditions surrounding it, will depend heavily on the trade credit financier’s source of capital, how they assess investment risk and, of course, how they identify each individual borrower’s operational risk. For example, a firm that has been around for many years and has proof of its successes will likely get a more attractive deal than a start-up firm without a track record.

Having said that, it is possible to obtain trade finance from a variety of sources, including:

  • Commercial banks
  • Multinational banks
  • Non-bank lenders specialising trade finance and private investment
  • Government-backed export creditors
  • Development banks

The trade finance source that a firm opts for will come with a unique set of pros and cons. For instance, obtaining trade finance from a bank will usually mean that property or equity will need to be offered up as security against the loans, whereas non-bank lenders will often be more flexible and more tolerant of investment risk.