How Trade Finance Works

How Trade Finance Works

Trade finance is a key means of financing international trade. It facilitates both import and export transactions for all sizes of entities including small business importers and large multi-national enterprises that import or export large quantities of inventories. Users of trade finance include producers, manufacturers, importers, traders, and exporters. 

Why Trade Finance is Beneficial 

Trade finance offers the benefits of increasing business and revenue through trade. It helps overcome a cash flow gap that might occur if an importer were to pay cash for goods, then have to wait potentially for weeks, with their cash tied up, until the goods arrive. Trade finance reduces payment risk. It accelerates payments to exporters and assures importers that all the goods ordered have been shipped. It reduces the risk of a faulty partner that may have a poor credit rating and a poor payment record. And it reduces the country’s risks which can include exchange rate fluctuations, political uncertainties, deteriorating economic conditions, and the lack of an equitable legal structure.  

How Trade Finance Works 

Trade finance brings a third party into import/export transactions. Third parties can include suppliers, buyers, banks, syndicates, and trade finance houses. Typically, the financing entity will require control of the use of funds, control of the goods, control of the source of repayment, visibility and monitoring throughout the transaction, and security over the goods and receivables.  

Trade finance products and services can include a letter of credit and a lender’s guarantee. A letter of credit is a promise made by the financing entity to the exporter committing that payment will be made upon shipment of goods purchase. The lender acts as a guarantor to assure that all the terms of the business contract will be fulfilled. Factoring in trade finance can be used to accelerate cash flow. 

Seek Expert Financing Assistance 

Contact Toluca Lake Capital for exceptional financing solutions. We offer a large portfolio of business loans to meet your needs so you can grow your business and achieve business success.