What is trade financing?

31 Jan

What does trade financing mean for the business person who wants to expand his business into the global market?

Trade finance can be described as working capital to fund future business through front end financing such as short-term or bridging loans, letters of credit and direct payment of suppliers.

The pitfalls of many businesses applying for trade finance are the lack of assets, goods, or signed contracts to act as surety for the financier.

Many things can go wrong before goods are delivered and paid for and a financier is looking for a sound track record from his client.

So how can you lessen the risks and make your business a viable prospect for a lender?

Establish a  sound credit history

Have some assets to serve as surety

Draw up a realistic business and financial plan

Deal with reputable companies

Draw up written contracts, this carries more weight than the prospect of potential business

Ask customers to pay a deposit – this shows that the customer intends honouring the contract.

When exporting goods there are other risks to be aware of such as:

Compliance with foreign regulations and standards

Customs clearance and unforeseen tariffs

Changes in foreign exchange rates

Damage to goods in transit

Non-payment of goods.

Finally, make sure that patents are registered before exporting goods as you could end up in costly litigation over intellectual property ownership rights.

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