The cost – namely the margin that will be applied in the commercial transaction – will be established based on the points below as well as the structure of the transaction.
Trade finance, or commerce financing, is a means to support international trade operations using various financial products and techniques. Its goal is to facilitate commercial exchanges by providing guarantees to the involved companies so that everything happens as smoothly and securely as possible.
Thus, various intermediaries such as banks or financial institutions will help to carry out transactions between the buyer (or importer) and the seller (or exporter).
The stakes of trade finance
Several reasons make trade finance activity essential for the involved parties.
Firstly, there are the risks to which companies are exposed: payment defaults, delivery delays, commercial disputes, exchange rate risks, cyber risks… These can sometimes completely ruin a business, especially since organizing long-distance exchanges, often in large quantities, involves very significant costs! For the involved actors, it is therefore a matter of protecting themselves from these risks with what constitutes insurance.
Moreover, since these activities are costly, trade finance products can also be a way for companies to preserve their working capital. Some of these instruments allow them to obtain short-term loans or to set prices in advance to optimize their activity.
Finally, there are the challenges related to regulation. International trade is subject to very strict rules, particularly because of the risk of fraud and counterfeiting, and trade finance is also a means of better complying with them.
The different trade finance products
There are numerous trade finance products. Among the main instruments used in the context of international trade financing, we can for example mention:
The letter of credit: issued by a bank on behalf of the buyer, it guarantees the seller that if the sales conditions are met, the payment related to this purchase will indeed be transferred as planned.
The bank guarantee: it is a commitment made by a bank to guarantee the payment of a debt incurred by its client.
The short-term loan: these are loans contracted to finance a company’s working capital needs, to be repaid over a short period.
Instruments for hedging against exchange rate risks: these are contracts that companies use to protect themselves from the risks of fluctuations in exchange rates.
Supply chain financing: this form of financing allows financing the purchases of raw materials and production costs while waiting for companies to be paid by their customers.
Structured financing: it involves using financial techniques to help companies obtain favorable rates for their financing.
Factoring: This is for the company to call on a factoring company to take on the risk of non-payment, or to finance receivables.