So, you’ve finally got there. You’ve put masses of time and work into your business, and now you’ve expanded enough to begin international imports and exports. You could have the best partnership or trade agreement in the history of your firm, but there may be room for improvement. These days, there are many different trade finance tools which can support your international trading. These helpful resources will help you manage your capital flows. They can also help you make sure that money is deposited in the right place at the right time. Overall, they’ll reassure you and the other party with generally smoother transactions.
Traditional trade finance is heavily centred around risk management. Let’s say you’re looking to export some goods to another country. To reduce your risk, you’ll want the customer to pay in advance. Similarly, the company on the receiving end will want a certain guarantee that the goods have in fact been shipped. To keep both parties happy, the importer’s bank will provide you with a documentary letter of credit. Other services banks may provide in this area include invoice financing and documentary collections.
A second ago, you may have asked: “What the heck is a documentary letter of credit?” This is a pretty big topic in itself, but I’ll try to give a simple explanation. A documentary letter of credit is an instrument from the customer company’s bank. It is used to guarantee that the payment to the exporter will be paid on time and will be the correct amount. Provided the exporter can come up with the right shipping documents, a letter of credit is airtight. If the importer can’t pay on time, the bank is required to meet the full amount. These are most commonly used for international transactions for a couple of reasons. The sheer geographical distance, and certain laws which differ from country to country. You can find more details here.
Documentary collections are another important tool to understand. They differ from letters of credit in that a bank in the importer’s country liaises on your behalf. Again, consider your company in the exporter position. You’d have to give the collection documents to your bank, which will, in turn, send them to the importer’s overseas bank. Once this has happened, the foreign bank will only release these documents to your customer for a payment. In some situations, they’ll be released for a firm enough commitment to pay at a later date.
If you’re only just taking your first steps into international commerce, it may seem daunting. Like any significant business move, there are risks involved. It’s recommended that you seek all the professional advice possible. If it’s pulled off well, international trade can do wonders for a business’s expansion. If it fails, this kind of commerce can bankrupt corporate giants and destroy reputations. Although there are potential hazards in expanding into the international arena, the rewards can be great. Triple-think every agreement and transaction. With a keen mind and enough knowledge, you’ll have a solid, healthy trade set up soon.