Using international trade finance to manage your cash flow and thrive!

12/09/2014

international trade finance

international trade financeThe lifeblood of a business is cash flow.

The existence of large receivables, the consummation of large deals or contracts, even the successful closure of a first international transaction are not as vital—especially for small- and medium-sized enterprises—as healthy cash flow.

Cash flow: cash and flow

Not only must the organization be doing business (cash!), but the revenue must also be coming in (flow!) within reasonable, and predictable, time-frames.

It does little good to do business successfully and issue an invoice for products or services duly rendered (and acknowledged to be satisfactory), only to have to wait 30, 60 or 90 days (or longer) for funds to be credited to the company account, while operating expenses, debt servicing payments and a host of other obligations force a company to abandon international expansion, or worse, push a business to the brink of bankruptcy.

Earning a good personal income, but being paid only every six months, would make it difficult to meet monthly mortgage payments and could conceivably result in foreclosure.

Similarly, earning good revenues from a business does not guarantee the viability of a business. Monies need to flow at regular, predictable intervals to facilitate good and effective conduct of business. Cash. Flow!

Using international trade finance to manage your cash flow

International trade finance products, techniques and mechanisms exist to support effective management of cash flow for both importers and exporters across industries and across all segments, from SME to multinational.

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The core needs of a company in terms of financing can be linked, for illustration purposes, to the size and stability of a business.

Small businesses survive and thrive on good cash flow, larger commercial ventures will look for financing solutions and large corporations and multinationals will typically be more concerned with risk mitigation.

Trade finance offers numerous solutions and instruments to ensure adequate cash flow.

Similarly, trade financiers have developed product and service offerings—in conjunction with other specialists—to assist clients in assuring there is adequate cash flow at critical stages in a trade transaction.

Increasingly, the optimization of cash flow and working capital is a value proposition offered by various providers to importers and to exporters.

Forms of international trade finance: How many ways can you get paid?

There are a variety of options in terms of payment mechanisms and other trade finance solutions. The basic and most common forms of settlement of international trade transactions are open account (where payment on delivery is the most common), documentary collections, documentary letters of credit and payment in advance.

There are numerous features, variations and options related to these payment types, which make them very flexible, adaptable and enduring as business solutions.

It should be noted explicitly that certain payment options or types of payment transactions have a variety of features or characteristics, which can be incorporated in a given transaction, or not.

International trade finance payment mechanisms

Open account and payment in advance—The two extreme options, providing maximum security to one party and exposing the other party to the greatest risk

Documentary collection—Somewhat secure, but generally used in established trading relationships involving reasonably stable and secure markets

Documentary credits—Offering the most balanced security for both parties

Confirmed documentary credits—Providing additional security to the exporter, while preserving security for the importer

This content is an excerpt from the FITTskills International Trade Finance textbook. Enhance your knowledge and credibility with the leading international trade training and certification experts.

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About the author

Jacob Varghese

Author: Jacob Varghese

Jacob is the VP of Marketing and Technology at the Forum for International Trade Training. Focused on improving the customer experience. A Content chef; words, images, some code and a healthy serving of web analytics.

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