Global Trade (or International Trade) and Business Financing is facilitation of international trade flows. The trade flows are mainly monetary activities that are interconnected to commerce. Global trade financing reduces and mitigates any business risks that are realized. Such risks could impact negatively on trade by affecting transactions. The mitigating measures include issuance of loans, issuance of credit letters, insurance, factoring and export credit.
The exporter, Importer and Financier are important players in a trade transaction. The exporter often requires payments for his/her goods or services offered. An importer always wants to make sure that the quality and quantity of goods or services provided meet their requirements. Once they have ascertained that they are not being swindled, the importer then proceeds to make payment.
Major Players in Global Trade
In the process of the Importer and Exporter working, two other important players are realized. Financiers and insurers are an important cog in the global trade and business machine.
Global trade finance has acted and enabled companies globally to trade and increase their market share. Organizations compete and get competitive partners who help them grow their business. Let us look at the roles of these four important players in global trade and finance.
The exporter could be a company or client seeking to sell goods or provide services in another country. As an exporter, you must be aware of your divergent needs in order to avoid any risks in your dealings. Take measures to protect your investment. The need for a guarantee(s) in this case can be achieved by obtaining a letter of credit or financier credit.
A. Letter of credit
The letter of credit is a letter opened in the exporter’s name by an importer through a financier. This acts as a guarantee of payment to the exporter once he has shown documentary proof that the goods have been shipped or the services provided. By using a letter of credit, risks that the exporter might encounter are minimized.
The letter of credit also acts as a guarantee to the exporter from the financier that they will receive cash on time and in correct amounts. In the event that the importer is unable to settle his transactions with the exporter, the financier will be required to pay the full or remaining amount of the purchase. The letters of credit mechanism is an important aspect in global trade and financing. It mitigates against factors such as distance, difference in laws and difficulty in knowing clients personally.
B. Financial Credit
Over the years, financial credit products by banks and other financiers have seen an upsurge. Financial credit usually works as an agreement between the exporter and financiers. In this case, the credit acts as the total borrowing capacity that the exporter is provided. Exporters get financed to ship or provide services. In return, the exporter pays back to the financier the amount borrowed, plus an agreed-on percent of the profits realized.
The importer seeks to buy goods or services from a company or individuals overseas.
When you are an importer, you are expected to know the laws of your country and the mechanisms at your disposal. You have a number of tools to protect your investment(s). While working with the exporter, ask for documentary proof all the time. Such proof could include a certificate of deposit or a promissory note.
The tools that the importer utilizes are known as negotiable instruments. They enable the importer to conduct business smoothly. These instruments may include bills of exchange such as drafts, promissory notes and certificates of deposit.
The promissory note is a financial statement containing a written undertaking by the importer dealing with the exporter. The importer takes an undertaking that after certain goods are delivered or certain services are provided he/she shall pay for according to the terms of the undertaking. A promissory note should contain all the terms pertaining to the indebtedness, such as the paying date, the interest rate, the principal amount, time and date of issuance, and the insurer’s signature.
These terms allows companies or individuals to get financing from financiers. The financiers can be individuals or companies that are willing to carry the note and provide the financing according to the terms and conditions of the agreement. Indeed, any individual may become a lender as long as they are comfortable working with a promissory note.
Certificates of deposit
The certificate of deposit is a certificate of your savings that has a fixed interest as well as a specified fixed maturity date. This may restrict your access to the investments funds until the maturity date of the investment. In terms of their legal backing, the certificates of deposit offer the importer a guarantee in the dealings with the exporter. Certificates of deposits are generally issued by financiers.
The Financier and The Insurer
Whether you are an exporter or importer, your financier and insurer guarantee the success of your business. They sometimes act as mediators and reconcile the needs of both importers and exporters.
In some cases, the exporter prefers upfront payment from the importer. Hence, the financier facilitates this by either lending financial credit or issuing a letter of credit. This helps mitigate the risks that the exporter may face by securing his/her goods or services.
The importer is facilitated by the financier and the insurer by having a financial source. The importer is issued with the promissory notes as well as certificates of deposit as a guarantee to undertake in the business transaction.
Both the exporter and importer will use the financier and the insurer to confirm and document the items shipped or serviced before the payment is done.
These players in international trade and finance have contributed so much to the enormous growth of international trade. More than 90% of all the global trade depends on these method of financing and transfer of trust in business. You may take up any role among the four we have detailed. Make sure to work with reputable organizations, companies or individuals when you are in the waters of international trade. A lawyer comes in handy to help you sift through all the legalese involved.