Trade finance products help mitigate the risks of international trade. Pre-shipment options include working capital loans, government guarantees, and export credit insurance, while post-shipment options include letters of credit and documentary collections. These products ensure exporters have enough working capital and receive payment quickly.
There are many different types of financial products that facilitate international trade. The most common trade finance products can be divided into products that affect the position of the exporter before the shipment of goods and those that affect his position after the shipment. These financing options include loans, guarantees, insurance, and credit extensions.
One of the key difficulties with trading across international borders is the time it takes from an importer placing a sales order with an exporter to the actual receipt of goods. Delay in shipment means that one party or the other has to absorb a greater risk of non-compliance: either by paying in advance under the risk that the order will never be delivered, or by sending the product on credit under the risk that the order will never be fulfilled. pay . Trade finance products exist to ameliorate that risk and ensure that exporters have enough working capital to be effective sellers on the international market.
The two points in the international sales transaction when the help of financial intermediaries is particularly important is prior to shipment, when the exporter decides to enter the global market, or when an importer first expresses an interest in buying through a purchase order. purchase, and after shipment, when the exporter has goods in transit and is awaiting payment upon delivery or sale. During pre-shipment, the exporter needs resources to produce the products and cash flexibility to be able to give the importer enough credit to be competitive against other exporters without tying up their cash in transit. After the goods have been shipped, the exporter needs payment as quickly as possible in order to be able to reinvest in more product.
Types of trade finance products used during preshipment include working capital loans, government guarantees, and export credit insurance. Also, purchase order financing, factoring, and a form of debt discount called forfaiting are important during this time. Working capital loans and government guarantee programs are often offered as a matter of public policy, to allow companies to enter the global marketplace by providing resources and working capital. Export credit insurance protects the exporter against default by the importer so that the exporter can extend credit terms. Specialized finance firms use purchase order financing, factoring, and forfaiting to take over the collection of an exporter’s anticipated receivables for a fee after an assessment of the importer’s creditworthiness.
Post-shipment trade finance products include various types of letters of credit and documentary collections. Letters of credit are bank guarantees that a party will honor its obligations under an international sales transaction. The bank serves as a type of escrow agent to exchange the documents that will allow the goods to be picked up for payment by the importer. Letters of credit can be secured or unsecured, and can support multiple sales or open sales terms. Documentary collections work much like letters of credit, in that the banks on both sides of the transaction handle the exchange of money for delivery documents.
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