Understanding International Trade Financing

Financing is a proven strategy for securing business revenue. Countless companies today secure their revenues or repayments from clients through less risky financing than putting hope on an unsure income no matter how feasible the business is. Domestic financial institutions provide companies sufficient money to sustain their businesses and, in return, the creditor owns the revenue or accounts receivable. This transaction is known today as factoring.

Factoring involves a third-party buyer. A company in a business venture can secure its revenue by selling the accounts receivable to the third party buyer (often called the factor) at a discounted price. That way, the receivables appear to be paid and the responsibility to collate them is transferred to the factor. Although this is common only to companies with unsure accounts receivables, this is fast being unconditionally implemented even with stable companies. Today, it plays a major role in international trade.

International trade is far more complex than domestic trade. It is considered a weak ground in business, as looking for trustworthy partners and clients is tedious. Legal and cultural differences form a barrier to having better business ventures. But with international trade financing, the complexity of transactions is dramatically reduced. While the financial institution also takes care of their interest as they involve in the business venture, they take most of the paperwork.

International trade financing helps increase sales. In the psychological aspect of the export industry, majority of the clients tend not to pay upfront. The idea is that they also protect themselves from not receiving the product or services they opt to pay for. In other words, if an export company requires clients to pay upfront before the products are shipped, clients might look for another provider implementing a different policy.

The main concept of international trade financing is the division of tasks. The export business takes care of the distribution of the product, while the financial institution providing the financing takes care of the collation of the repayment. That way, both parties benefit from the business.

There are two types of loans available in an international trade financing program. One is a short loan term lasting 180 days. Sixty-five percent of the risk is covered while the importer is required to furnish a promissory note. The other, long loan terms, last for up to 10 years and 98 percent of the risk is covered.