SMEs across the world work hard to fulfil customer needs. The idea of trade finance is to give them the financial support they require to not just carry on their businesses but also eventually expand their scale of operations. When it comes to shipping goods domestically or internationally, companies are exposed to various financial risks that are brought in due to a difference in currencies and facilitating international payments. Trade finance also aims to reduce these risks in different ways.
- Guarantees: Guarantees refer to financing instruments that provide the security of payment to buyers. They are most commonly used in agreements between large international firms and local SMEs. To ‘prove’ their credibility, SMEs are asked to provide a guarantee. These guarantees can be issued by a financial institution or a bank as they act as a guarantor to state that the payment will be made for sure once the transaction is complete. If a demand guarantee is in power, the guarantor is expected to fulfil the payment if the buyer is incapable to do so.
- Letter of Credit (LC): A letter of credit is a powerful trade finance tool that works as a proof document between a buyer and a seller to ensure that the required payment has been made correctly and on time. The key purpose of an LC is to ensure that the seller makes the accurate delivery of goods as per their agreement with the buyer and the buyer compensates the seller with the amount that has been agreed upon. This brings in a sense of assurance for both parties as they continue to carry forward with their trade.
- Insurance: Just like most insurances, trade insurance not only protects the goods and services in question but also from any risks of non-payment. It reduces the risks that are taken by both parties by offering coverage against any goods that are lost or damaged during the process. Likewise, it also acts as an important mediatory in case things fall apart on your buyer’s end and they refuse to make the payment they promised (for a variety of reasons). Seawise Capital ensures to offer its clients credit insurance amongst other products to protect them from buyer bankruptcy.
- Factoring: Invoice factoring is a relatively quick way for businesses to gather cash for their regular operations as opposed to waiting for customers to provide their payments (which are listed in their invoices). Businesses sell their invoices to trade finance companies who in turn provide the cash to them at an accelerated rate. The customers then pay their invoices to the trade finance company to settle the dues. What’s the advantage? You get to fund your new orders and operations almost immediately as the money provided by the trade finance company acts as working capital. This, in turn, leads to further growth – both domestically and internationally.
- Advance payments: This kind of trade financing solution is particularly beneficial for the seller. It offers an advance payment on the order made by the buyer – either in full or in part. The time of the payment can be as quick as when the order gets confirmed. Wire transfers or credit cards are the most commonly used methods of making payments in advance.
Seawise Capital works tirelessly to ensure you receive the best trade financing options whether you’re an exporter or importer. Reach out to our team to clarify any queries you may have as we would be happy to assist you.