There are several methods to achieve trade financing. However, the most common is the Letter of Credit
, a document banks offer to protect global trading activities. This international trade finance option is available in different forms, given the purpose for which the fund is required, whether personal or commercial.
Supply chain financing
(SCF) is the method that keeps the supply chain efficient. Some exporters do not agree to offer goods on credit to importers, which might delay the meeting of customer demands in the market. Through SCF, the export-import process remains uninterrupted as the trade finance providers pay exporters on importers’ behalf. In addition to the supply chain funding method, export-import efficiency can also be controlled using the export contract, which a bank provides as proof of loan offered to exporters.
Trade Finance types
There comes the purchase order financing, a pre-shipment funding alternative. Through purchase order, the lender pays an upfront amount, a certain percentage of the total cost of supplies. The finance is received by suppliers directly.
The next on the list is invoice discounting, which is one of the most popular forms of trade finance. Under this option, the invoice ownership is transferred to sellers, who make debtors
liable to the financing company directly. In short, the funding and repayment occur between the buyers and the lenders. The sellers are present nowhere in the process.
Last but not least is receivables financing which is a claim for repayment. It signifies the company’s right to receive the amount another party owes. It is a legally enforceable document that businesses hold for products and services so