Five Key Financing Methods for International Trade
In order to mitigate the incidence of risk while performing international trade, there are various technical methods that you can resort to. The key is to make a set of strategies and implement the optimal measure while you are committing to business projects involving importing and exporting goods internationally. If you are a business owner in the UAE region, you might be already aware of the fact that international trade and finance plays a huge role in accelerating the commercial activities in the country. Continue reading to know about the financing methods in the competitive market in this context.
Letters or Documents of Credit
These are major instruments of financing various processes of international trade activities. The bank issues the letter taking into account the credibility of the buyer. The issue of credit worthiness is dealt professionally by the involved parties. The exporter gets additional assurance regarding this before signing the deal. It is also a protective tool for the buyer because until all the order quantities are shipped, there is no compulsion regarding payment.
Method of Cash-In-Advance
With the implementation of this measure, you, as an exporter, get a considerable fraction of the payment before the delivery of the goods or the services. It helps you to a reasonable extent in decreasing the credit risk of the trade. There are good platforms that provider escrow services, taking care of such measures. But a point to be kept in mind is foreign buyers are often skeptical to use this method as chances of receiving the order are not always full-proof.
Method of Documentary Collection (DC)
In this financing method, the onus is on the bank to receive the payment and process it accordingly to the seller via following instructions of documents related to the deal. If you are an exporter, then you share the relevant trade contract documents with the bank along with payment conditions. The bank uses the instrument if DC to conduct the necessary procedures to secure payment from the buyer.
Open Account
It involves high-risk in the arena of international trade. But as an exporter, you cut competition and stay ahead in the race on several occasions. The order is being exported to the buyer in full quantity without any payment to capture the market. For lowering the risk of non-payment, appropriate financial techniques are utilized.
Consignment
Consignment is a more sophisticated version of the open account method where there is involvement of a distributor in the network of exporter and importer.
Use the Methods Strategically
You need to intelligently use the correct financial method to get the desired results in the long term.