Trade finance as a competitive advantage

The ability (typically, but not exclusively) for exporters to offer “terms,” or a financing package, to importers to close the sale is increasingly common in international trade and global commerce. Evolutions in the area of supply chain and global sourcing, driven some say by the largest global retailers, include the expectation that exporters will carry a significant portion of the financing burden of a transaction, despite the superior financial strength of these importing retailers.

The more traditional or historical view assumed the ability of some exporters in certain parts of the world to secure financing at relatively low (i.e., more attractive) rates. In doing so, these exporters were able to offer financing options to importers based on a low cost of funds, again increasing the probability of securing a sale.

Access to competitively priced financing—or lack of it—is frequently cited as a key element of global competitiveness in various industry sectors, from capital projects to service sector exports.

Risk and ownership of goods can transfer between exporter and importer at various points in the life of a transaction. Similarly, financing can be triggered at various points in a transaction—from pre-shipment financing, which favours the exporter, to import financing (an exporter is paid immediately by the bank, while an importer is permitted to reimburse 90 days later, for example) at the end of a trade transaction, which assists the importer.

For an exporter, selling on open account requires post-shipment financing; one option is to sell receivables at a discount under a process referred to as “factoring.” Under this arrangement, a factoring company, often a bank, will take the credit risk of the invoice and pay the client a percentage up front. This may satisfy an exporter’s need for cash flow but is generally an expensive form of financing.

Favourable terms can make a significant difference when pursuing opportunities with governments, particularly, but not exclusively, in emerging or developing markets. Likewise, the ability of banks to offer financing to other banks in less solvent markets (or in markets where foreign currencies may be in limited supply) can be very helpful in securing business.

A lack of ability or willingness to offer financing terms to potential trading partners can be sufficient reason to terminate negotiations before other aspects of the transaction, such as the unique value proposition or the superior quality of the merchandise being sold, can be fully presented or evaluated.

Trade finance is not merely about payment or the end result of a deal: It can be a vital element of business development in international trade and global commerce.

Sourced from FITTskills International Trade Finance—Online course: Get the knowledge you need to manage and mitigate your company’s global financial risks. Register now!