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  • Writer's picturePeter Klitou

What is trade finance?

The financial terms Import Finance and Export Finance are used interchangeably with Trade Finance. In order to address some of the common issues and misunderstandings around Trade Finance, we have put together this short guide.

These include:

  • Purchase Order Finance

  • Stock Finance

  • Structured Commodity Finance Invoice Finance (Discounting & Factoring)

  • Supply Chain Finance

  • Letters of Credit (LCs)

  • Bonds & Guarantees

Trade Finance is the financing of goods or services in a trade or transaction, from a supplier through to the end buyer. It accounts for 3% of global trade, worth some $3tn annually. ‘Trade Finance’ is an umbrella term, which includes a variety of financial instruments that can be used by an importer or exporter.

How can trade finance benefit my business?

Trade finance facilitates the growth of a business by securing funds required to purchase goods and stock. Managing cash and working capital is critical to the success of any business. Trade finance is a tool that is used to unlock capital from a company’s existing stock or receivables or add further finance facilities based on a company’s trade cycles.

Why does this help? A trade finance facility may allow you to offer more competitive terms to both suppliers and customers, by reducing payment gaps in your trade cycle. It is beneficial for supply chain relationships and growth.

Other benefits of trade finance

  • Short-term working capital, using the underlying products being imported as security/collateral. It increases the revenue potential of a company, and earlier payments may allow for higher margins.

  • Trade finance allows companies to request higher volumes of stock or place larger orders with suppliers, leading to economies of scale and bulk discounts.

  • Trade finance can also help strengthen the relationship between buyers and sellers, increasing profit margins. It allows a company to be more competitive.

  • Managing the supply chain is critical for any business. Trade and supply chain finance helps ease out cash constraints or liquidity gaps – for suppliers, customers, third parties, employees or providers. Earlier payments also mitigate risk for suppliers.

  • small businesses can use trade finance to trade significantly larger volumes of goods or services and work with stronger end customers.

Due to the embedded risk mitigants that surround trade finance lending and instruments, it leads to the potential of a diversity of supplier base for trading companies. A more diverse supplier network increases competition and efficiency in markets and supply chains.

Companies can also mitigate business risks by using appropriate trade finance structures. Late payments from debtors, bad debts, excess stock and demanding creditors can have detrimental effects on a business. External financing or revolving credit facilities can ease this pressure by effectively financing trade flows.

Eptagon Business Solutions now in Cyprus offers, Import Trade finance and supply Chain Financing offering terms of up to 60 days credit and therefore giving an additional repayment extension from the supplier/importer existing terms.

*Bibliography /sources:

TFG Trade Finance and International Trade hub

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