The World Trade Organization (WTO) reports that up to 80% of world trade relies on some type of credit. Trade finance is a kind of credit offered by a third party, which can be a bank, trade finance company, or other financial institution. The financial institution of choice, apart from supplying the company the means to pay the supplier on time, also oversees the trade, making sure that all parties have fulfilled their obligations. According to WTO, without a suitable trade finance solution, business expansion is extremely difficult to achieve.
Improving the cash flow
Once you’ve learned how to prepare yourself to become a profitable trader, it’s time to begin your trading journey. To attract and retain customers, you may offer them credit, especially when you’re selling products to businesses that buy your products in larger quantities. However, waiting for payments is going to disrupt your cash flow. This is likely to lead to you making late payments to your supplier. That’s where trade finance comes in handy. Trade finance allows you to make timely payments to your vendor every time, and then pay off your credit with a reasonable interest rate at a later date. Improving the cash flow utilizing trade finance can certainly help your business expand, as you’d be able to offer favorable credit terms and in turn gain more customers. What is more, it will also be helpful as the demand for your products increases, since you’d be able to buy more supplies at once without having to wait for your customers to pay you.
Building trust with your vendor
Since trade finance enables you to pay your vendor upfront, this is bound to instill trust in them. Employing a trade finance solution is beneficial for your vendor as well since it improves their cash flow. Therefore, they are likely to be very grateful that you’re never late with making payments. Maintaining a good relationship with your vendor is going to make doing business with them more pleasant. Not only that, but they might offer you a discount for making advance payments. This can foster business growth as you can use the money you save to make other necessary investments.
You can choose the type of trade finance that suits your needs
Some vendors offer companies to purchase the supplies on credit. However, this usually means that you don’t have many options to choose from regarding the credit terms. If you opt for trade finance, you can pick the financial institution and the type of credit that suits your needs. Some of the financial institutions that offer trade credit include:
- banks,
- trade finance companies,
- export credit agencies.
For instance, if you opt for the reputable trade finance company, Octet, you have the option to repay the credit within 120 days under your trading terms. You also get up to 60 interest-free days. When it comes to types of credit different financial institutions offer, typically you can choose letters of credit, factoring, export credit, etc.
Decreasing the common risks of trade
Apart from helping you pay your supplier upfront, the financial institution of your choice supervises the trading process. This significantly reduces the common risks of a trade, such as the goods you paid for not being shipped. The financial institution will make sure that the goods are paid for and that the buyer receives them. That way, both parties involved in the trade can feel at ease as the risks of suffering any financial losses are reduced. This helps establish the trust between the buyer and the seller.
Enabling you to bypass the problem of currency fluctuations
International trade allows a business to expand rapidly. However, this also means that you have to deal with several different currencies. More extreme currency fluctuations can cause you to be at a significant financial loss. The advantage of trade finance is that most trade finance companies offer their services in multiple currencies. This means that the financial institution will pay your supplier in the currency they ask for. That way, you’ll be able to avoid losing money due to fluctuations in currency.
Final comments
Trade finance can be the perfect financial option for many businesses. It fosters business growth by improving the cash flow, helping you establish trust with your supplier, and allowing you to choose an adequate financing option. Furthermore, it decreases the common risks of a trade, since there is an intermediary that oversees the trade. It’s also convenient because you don’t have to worry about losing money due to currency fluctuations. All in all, this financial option comes with a range of benefits, which is why businesses looking to expand should consider it.
