What are the Types of International Trade Finance?

Financing an international trade simply means providing funds for various international business dealings. This has become possible through international factoring by international buyers or purchase order financing by international suppliers. Options for financing international trade vary greatly but all of these options offer enough flexibility to reduce cost and increase revenue.

Financing international trade may offer several benefits for those companies intending to increase their venture in the market. These advantages include minimal paper works involved as it is taken care of by the creditor, no underwriting by the importer, increase in export sales, flexible credit terms and fast turnaround time. In numerous countries, trade finance is often sustained by quasi-government units commonly known as export credit agencies that work with commercial banks and other financing institutions.

Trade finance may be as easy as funding international businesses to sustain their growth. However, it becomes a little-bit complex as it comes in various types. These types may include letters of credit, forfaiting, trade and transaction finance, VAT export finance, and import finance.

Letters of credit as a type of international trade finance are mainly used in the import and export or products and services from other countries. Exporters are guaranteed that they will be paid for the products and services and the importer will receive the goods. Generally, the letter indicates a specific time frame for payment and delivery which both parties have agreed upon. Letters of Credit are known to provide security to exporters and importers.

international trade finance may also be in the form of forfeiting which allows you to receive the payments immediately and fix currency rates and interest rates on transaction made abroad. Trade and transaction finance, on the other hand, are typically used for the import of goods and services, mostly from Asia. In this type of finance, a lender steps in between parties during transaction where client becomes the supplier to the lender and the lender becomes the supplier to the end purchaser.

The other two types of International trade finance, namely: VAT Export Finance and Import Finance can be arranged within three months while generating working capital. Some trade finance institutions have access to additional facilities that can dramatically reduced cost depending on the business model. Other funding methods can also be available depending on the circumstances on which the business operates.