Trade finance tools

08 July 2014 / Published in Business

If you’re considering importing stock or beginning to export your goods to overseas markets, there are a range of trade finance tools to help your operation run smoothly.

Trade finance involves managing capital flows in international trade – this means money is deposited where it needs to be and on time, and both parties are given confidence that each will benefit from a smooth transaction. A wide variety of tools determine how cash, credit, investments, and other assets can be used for trading internationally.

Traditional trade finance

Imagine a situation where you’re exporting goods overseas. You would expect the importer to pay in advance for your goods before you ship them, while the importer will understandably want proof that the goods have shipped to reduce their risk. To facilitate this, a documentary letter of credit is provided to you from the importer’s bank.

There are other ways that banks can help your business trade globally, including:

  • Invoice financing.
  • Documentary collections.
  • Trade finance loans.
  • Bonds and guarantees.

Documentary letter of credit

This is a negotiable financial instrument from an importer’s bank guaranteeing that payment to an exporter will be the correct amount and received on time subject to the exporter presenting compliant shipping documents. If the importer can’t pay for the purchase, the bank is obliged to meet the full outstanding amount.

Letters of credit are commonly used for international transactions – due to distance and different laws in each country, they’ve become vital elements of providing surety in international trade.

Invoice financing

Your bank might offer short term financing to improve an exporter’s cash flow and working capital positions. This can involve a bank buying your unpaid invoices for a fee.

Documentary collections

Here, a bank in the importer’s country acts on behalf of the exporter. If you’re exporting goods, you’d give the collection documents to your bank which will send them to the importer’s bank overseas.

The foreign bank will only pass the documents onto the importer in exchange for payment, or a firm commitment to pay at a later date.

Trade finance loans and supply chain finance

Trade finance loans could be an option if you need help managing short term foreign currency transactions. For example, as an exporter your bank might loan your business funds based on an export contract or as an importer to fund supplier contracts.

Bid bonds

As an exporter, bid bonds are a bank guarantee of the financial standing of your business to support your bid for a commercial contract. In the event you are the successful bidder these bonds usually roll through into a Performance Guarantee. 

Performance guarantees

Once you have successfully bid for a commercial contract, Performance Guarantees are instruments issued by your bank to guarantee your performance under the contract.

If you are an importer and have entered into a contract to buy goods from an exporter, promising to meet financial obligations even if you default, the bank will promise that payment.

These guarantees give both parties financial security by compensating for losses if either fails to meet their contractual obligations – typically for an amount around 5 to 10% of the full contract value. These guarantees help give the importer confidence as well as their bank that may be financing part of or the entire contract.

Have a look at the trade finance services ASB can offer your business.


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