International trade relies on financing methods such as working capital financing, cash upfront, and open accounts, which use trade finance products to increase cash flow and reduce risk. Exporters choose financing methods based on resources and transactional risk, with access to international markets expanding customer bases. Working capital financing, cash advance, and open account terms are common methods, each with their own benefits and drawbacks.
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 upfront, 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 available and the transactional risk they can absorb. The ability to access international markets is an important strategic opportunity for manufacturers and sellers because it expands a company’s customer base exponentially. However, international trade is much more complicated than doing domestic sales, and it comes with internal and external stressors that often determine whether a business can effectively operate globally.
The method an exporter uses to finance international trade depends on these stress factors. A company can only export goods if it can afford to manufacture them and expect payment at some point in the future when the goods are delivered or sold to the importer. Furthermore, a company can only enter the export business if it can find 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 advance, transferring the risk to the importer. Unfortunately, an exporter that requires importers to pay in advance may not be as competitive in the international marketplace as an exporter that can wait for payment.
To address the internal tensions of financing international trade at the level of manufacturing and cash flow, an exporter may use several types of working capital financing. This financing method uses loans and guarantees from government programs designed to help exports, specialized programs from international trade associations, and export credit insurance offered by casualty companies. Working capital financing impacts the exporter in the pre-shipment phase and allows them to participate in international markets as a threshold matter by stabilizing cash flow and ensuring importer performance.
The cash advance method of financing international trade requires the importer to pay for their orders in advance. It eliminates the transactional risk of the exporter, but it also makes it difficult for him to compete in the market. Electronic payment methods, such as the use of credit cards and bank transfers for payment, are the distinguishing features of this method.
The use of open account terms is the international trade financing method that has the most significant involvement of banks and financial services companies. The financing options under this method mainly affect the post-shipment phase of the transaction. Letters of credit, a debt reduction method called fafa, factoring, and documentary collections all fall under this method.
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