How Does Trade Finance Work for Businesses?

We’re living in a very interconnected world these days where you can set up shop one day in Smalltown, USA and be selling to a customer in London, the very next day! Globalization is certainly something that businesses can take advantage of and profit from.

With our ever increasing interactions between people in different countries – businesses are jumping at the chance to increase their market share by offering their product or service to new customers abroad.

Associated with this increased interaction however are some inherent risks. What if the product I export doesn’t get received OR I don’t get paid? How do I know the importer is legit?

More and more companies are using trade finance services to facilitate transactions in other countries. So, what is “trade finance”?  According to Export.gov, it is

“A means to turn export opportunities into actual sales and to get paid for export sales—especially on time—by effectively managing the risks associated with doing business internationally.”

Obviously, both parties are taking a risk in the business transaction. The seller (exporter) wants to receive payment as soon as – or before – they ship their product while the importer wants to delay payment for the product as long as they can before it is resold so they can pay the exporter.

There are generally four methods for the transaction to take place:

  1. Open account
  2. Documentary collections
  3. Letters of credit
  4. Cash in-advance

Each has its varying degrees of risk – and you should be aware of this if you are going to ship internationally.

How have you managed your shipments internationally?

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