What does it mean?
Trade credit, also known as finance, represents a company’s financial products and instruments to facilitate international trade. This finance makes it easy for the importers and exporters to carry out business through trade. This is a large industry and includes importers, exporters, producers, manufacturers, and traders. These people are the users of this finance. The other section is the provider of trade finance. This section includes banks, suppliers, buyers, and syndicates.
Trade credit settles opposite needs of the exporter and the importer. The importer tries to lessen the supply risk, which will give them the benefit of receiving bonus credit on the payment. Whereas the exporter tries to lessen the payment risk, it will benefit from using the received. The trade credit plays a role as a third person to remove both the risks while providing what the importers and the exporters wish for.
There are a lot of benefits of trade credit
The importer and the exporter do not have to disturb their working capital that can be used in other techniques. This results in the easy flow of cash.
- Growth of business:
Trade credit is a mode of working capital that gives the security of the import or the export with supporting structures lessens risk.
- Lessens risk from suppliers:
Trade credit lessens any risks on the part of the exporters and provides extra security to the importers.
- Prevents bankruptcy:
Trade credit prevents the risk of payments from the importers. It can help businesses from bankruptcy.
Importance of trade finance:
The importer transactions can happen both domestically and internationally. The financial transactions are carried forward by trade financiers. This is how the process goes.
- This finance reduces the risk of payment: trade financiers reduce the risk from both sides. They accelerate payments to the sellers, preventing the doubt of non-payment. On the other hand, they assure the buyers that their goods have been shipped. They act as a third person to help the importers and exporters to know that they are not at a loss.
- The exporter might get a loan from their bank to keep the process going. Later, the loan will get recovered when the exporters’ bank receives the payment. This is done with the help of the trade financier.
- Other services of trade financiers:
- Letter of credit: the importer assures to pay back the exporter once the goods are received.
- Bank guarantee: if the importer does not pay for whatever reason, the trade financier takes responsibility and pays the money.
- Factoring: This is a method often applied by the exporter to mitigate bad debts and provide working capital. The exporter sells at a discount, their open invoices to the bank. The bank then waits to receive the payment of the importer.
- Forfaiting: this is where the exporter receives all the cash in advance by selling receivables at a discount. This prevents the risk on the exporter’s end. These receivables are sold to a forfaiter to whom the importer pays the amount. Here, the role of the forfaiter is played by the bank.
Reliable trade financier:
One needs a reliable trade financier. Few trade financiers like octet act as a third party and make trade easier for importers and exporters. With their help, one can build relationships with various suppliers without any problems with cash flow. They can help remove the working capital gap between the importer and the exporter. The funding options of the working capital are diversified, and the business grows. The process of engaging with them is simple and easy.
One can benefit a lot with the help of a trade financier. If one knows everything about trade financing, they are good to go.