how trade financing reduces risk
trade finance can help reduce the risk associated with global trade by reconciling the divergent needs of an exporter and importer ideally an exporter would prefer the importer to pay upfront for an export shipment to avoid the risk that the importer takes the shipment but refuses to pay for the goods however if the importer pays the exporter upfront the exporter may accept the payment but refuse to ship the goods a common solution to this problem is for the importer s bank to provide a letter of credit to the exporter s bank that provides for payment once the exporter presents documents that prove the shipment occurred like a bill of lading the letter of credit guarantees that once the issuing bank receives proof that the exporter shipped the goods and the terms of the agreement have been met it will issue the payment to the exporter with the letter of credit the buyer s bank assumes the responsibility of paying the seller the buyer s bank would have to ensure the buyer was financially viable enough to honor the transaction trade finance helps both importers and exporters build trust in dealing with each other and thus facilitating trade 5trade finance allows both importers and exporters access to many financial solutions that can be tailored to their situation and often multiple products can be used in tandem or layered to help ensure the transaction goes through smoothly other benefits to trade financebesides reducing the risk of nonpayment and non receipt of goods trade finance has become an important tool for companies to improve their efficiency and boost revenue trade finance helps companies obtain financing to facilitate business but also it is an extension of credit in many cases trade finance allows companies to receive a cash payment based on accounts receivables in case of factoring a letter of credit might help the importer and exporter to enter a trade transaction and reduce the risk of nonpayment or non receipt of goods as a result cash flow is improved since the buyer s bank guarantees payment and the importer knows the goods will be shipped in other words trade finance ensures fewer delays in payments and in shipments allowing both importers and exporters to run their businesses and plan their cash flow more efficiently think of trade finance as using the shipment or trade of goods as collateral for financing the company s growth trade finance allows companies to increase their business and revenue through trade for example a u s company that can land a sale with a company overseas might not have the ability to produce the goods needed for the order however through export financing or help from private or governmental trade finance agencies the exporter can complete the order as a result the u s company gets new business that it might not have had without the creative financial solutions that trade finance provides without trade financing a company might fall behind on payments and lose a key customer or supplier that could have long term ramifications for the company having options like revolving credit facilities and accounts receivables factoring can not only help companies transact internationally but also help them in times of financial difficulties 