As we discussed throughout our ‘international finance’ section, engaging in international trade requires tremendous financial resources. Conducting international marketing research, adapting your product for the export market, increasing production capacity and ultimately, marketing for exports may require more capital than you and your business has on hand. It is also common practice when conducting international business that you must agree to lengthy credit terms to conclude an international sales negotiation. For example, to win a particular deal, you may be required to consider extending credit terms of 30, 90 or even 180 days to your buyer.
The high upfront cost and periods between payments for export transactions put considerable strain on a business’s cash flow. While problems with cash flow are not a foreign concept to African companies, engaging in international trade often amplifies cash constraints. The hard truth is that the difference between success and failure for African exporters could come simply from their ability to access the appropriate trade finance.
What is Trade Finance?
Trade finance, in broad terms, is the financial instruments and products utilised by exporters to facilitate international trade.
What are the various types?
Similar to the types of export credit insurance, trade finance can be short, medium and long-term, as well as pre and post-shipment. Short-term trade finance usually requires repayment to the financier within 12 months. Medium-term export finance is generally needed for a period longer than a year but not exceeding five years. Long-term trade finance is likely to stretch for a period well in excess of five years. Pre-shipment trade finance assists exporters between the date a contract is concluded with an overseas buyer and the date the goods are shipped, i.e. with the seller’s working capital requirements. Post-shipment finance assists the exporter from when a consignment of goods is shipped under a contract until the final payment is due.
What types of Trade Finance products are available?
The trade finance product utilised by an exporter will depend on their particular circumstances. However, an exporter could attempt to use a bank overdraft facility, a fixed-term loan, a Customer Foreign Currency (CFC account) or a factoring facility.
Access to trade finance is a significant issue facing the growth of exports from Africa. To contribute to solving this problem, the TFSA School of Export has developed an entire module dedicated to providing information on how to resolve potential cash flow problems. Through the online TFSA School of Export, we will introduce you to the various trade finance products that could be available. Click the link below, sign up for the free online module, and better understand how you can finance your export initiative.
To sign up to the School of Export CLICK HERE.
If you already have a profile, CLICK HERE to login to begin the module.