Escalate your Imports/Exports Business by Learning about Trade Financing!

By Sakshi Srivastava - 17 May 2022 Last Updated: 05 Jul 2022
Escalate your Imports/Exports Business by Learning about Trade Financing!

Financial instruments and products used by businesses to facilitate international trade and commerce are referred to as trade finance. Importers and exporters can conduct business more easily and efficiently with the help of trade finance. Trade finance is a broad phrase that refers to a variety of financial instruments used by banks and businesses to facilitate trade transactions.

Therefore in today’s blog, Dhanguard will thoroughly discuss Trade Finance in the United Arab Emirates. So without any further ado, let’s begin!

Some Relevant Pointers regarding Trade Finance-

  • Financial instruments and products used by businesses to facilitate international trade and commerce are referred to as trade finance.

  • Importers and exporters can conduct business more easily and efficiently with the help of trade finance.

  • By harmonizing the opposing demands of an exporter and an importer, trade finance can assist lessen the risk involved with global trade.

Mechanisms of Trade Finance

The purpose of trade finance is to add a third party to transactions in order to eliminate payment and supply risks. The exporter receives receivables or payment in accordance with the agreement, and the importer may be given credit to complete the trade order.

Trade financing involves a variety of partners, including:

  • Importers and exporters

  • Insurers

  • Export credit agencies and service providers

  • Banks

  • Trade finance companies

Trade finance is not the same as traditional financing or credit issuance. General finance is used to maintain solvency or liquidity, but trade financing does not always signal that a buyer is short on cash. Instead, trade finance can be used to protect against the special risks that come with international trade, such as currency fluctuations, political unrest, nonpayment concerns, or the creditworthiness of one of the parties involved. 

Some of the financial instruments used in trade finance are listed below:

  1. Banks can extend lending lines of credit to assist both importers and exporters.

  2. Because the buyer's bank guarantees payment to the seller for the items transported, letters of credit lessen the risk of worldwide trade. The buyer, on the other hand, is safeguarded because payment will not be made unless the seller complies with the terms of the LC. For the transaction to be completed, both parties must adhere to the terms of the agreement. 

  3. Factoring is when a percentage of a company's accounts receivables is paid to them.

  4. Exporters might be provided with export credit or operating capital.

  5. Insurance can be used to cover the cost of shipping and delivery of products, as well as to safeguard the exporter against nonpayment by the buyer.

Trade finance makes international trade more efficient, despite the fact that it has existed for decades. The widespread use of trade finance has facilitated international commerce expansion.

Read More: Why Choosing a Financial Planner is Mandatory in the UAE?

How Trade Financing Helps to Lower Risk

By harmonizing the opposing demands of an exporter and an importer, trade finance can assist lessen the risk involved with global trade. To eliminate the possibility of the importer accepting the shipment but refusing to pay for the products, an exporter would prefer the importer to pay upfront for an export shipment. The exporter may accept the payment but refuse to dispatch the products if the importer pays the exporter in advance.

  • A frequent solution to this dilemma is for the importer's bank to issue a letter of credit to the exporter's bank, which guarantees payment if the exporter exhibits proof of shipment, such as a bill of lading. The letter of credit assures that once the issuing bank gets proof that the exporter shipped the products and that all of the terms of the contract have been met, the payment will be made to the exporter.

  • Payment to the seller via a letter of credit is the responsibility of the buyer's bank. The buyer's bank would have to check the buyer's financial ability to complete the transaction. Trade financing benefits both importers and exporters since it helps them build trust in their transactions with one another, facilitating trade.

Advantages of Trade Finance

Trade finance has become a significant tool for businesses to improve their efficiency and increase revenue, in addition to lowering the risk of nonpayment and non-receipt of goods.

More advantages of Trade Finance are mentioned below-

Increase of Profits and Revenues

Trade finance enables businesses to grow their business and revenue by allowing them to trade more. For example, a company in the UAE that can land a sale with a company in another country may not be able to supply the goods required for the order.

The exporter, on the other hand, can complete the order with the support of export financing or commercial or government trade finance institutions. As a result, the U.S. company receives new business that it would not have received otherwise due to the innovative financing solutions provided by trade finance.

Reduces the Chances of Financial Difficulty

A firm that does not have trade financing may fall behind on payments and lose a major customer or supplier, which could have long-term consequences for the organization. Options such as revolving credit facilities and accounts receivables factoring can assist businesses not just in foreign transactions but also in times of financial difficulty.

Improves Cash Flow and Operational Efficiency

Trade finance assists businesses in obtaining funding to help them expand their operations, but it is also a kind of credit in many circumstances. In the instance of factoring, trade financing allows enterprises to obtain a cash payment based on their accounts receivables. A letter of credit can assist both the importer and the exporter in completing a trade transaction while lowering the risk of nonpayment or non-receipt of products. As a result, cash flow is enhanced because the buyer's bank guarantees payment and the importer has assurance that the items will be transported. To put it another way, trade finance guarantees that payments and shipments are processed more quickly, allowing importers and exporters to run their operations and arrange their cash flow more effectively. Consider trade finance as a way to fund a company's expansion by using the shipment or trade of goods as collateral.

Conclusion

In the United Arab Emirates, trade financing is becoming more prevalent, and most local and international banks now provide services to small and medium-sized businesses, allowing them to deal with both local and worldwide markets. Commercial Letters of Credit (LCs) are widely used in international trade as a source of payment. Trade Financing can help escalate your business and could be a viable option for financing. We hope this blog provides you with insightful information. For more information on other related aspects, feel free to check out the Website as well.

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By Sakshi Srivastava

17-May, 2022

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