Overcome 3 of the biggest trade finance challenges with these tips

As any experienced international trade professional can tell you, doing business in global markets isn’t without its trade finance challenges.

Breaking into a new market often involves a significant investment upfront, and keeping track of currency fluctuations can be an ongoing concern once you do. On top of that, it’s not always easy to secure payment, and chasing down money owed to you or your business can be a real hassle.

With these trade finance challenges in mind, here’s some advice from case studies from the FITTskills International Trade Finance course that will help smooth the path towards success.

1. How do I choose the right bank or financial institution to help finance my international business?

The thought of taking out a sizable loan or financing plan can cause trepidation. Fortunately, taking the right steps before money ever changes hands to select a financial partner you trust and will offer you what you need should alleviate many of your concerns.

Like many aspects of exporting and importing, thorough research of several options is necessary. It’s OK to have a preferred option in mind, but make sure you’re not missing opportunities elsewhere that could benefit your business in the long run. Thoroughly investigate and compare each option before you even make an initial appointment, and understand the costs, benefits, and disadvantages of each option.

Having trouble deciding which options to focus on? Referrals are one excellent option.

If a bank or financial institution has worked well for similar companies you know, it could be a strong option to start your search.

Government-supported options are also excellent places to look for financing. In Canada, organizations such as Export Development Canada (EDC) and the Business Development Bank of Canada (BDC) are well equipped to help you with trade finance challenges, while American companies can look at the U.S. Export-Import Bank and the U.S. Small Business Administration.

2. How can I minimize risk related to fluctuations in foreign currency?

While a change in the exchange rate could potentially reduce costs, it’s the opposite situation where a change increases costs that can keep finance professionals up at night.

One solution could be to write a fixed rate of exchange directly into a contract, along with the price, date and quantity of an order. This type of contract is known as a forward foreign exchange contract. While this forces you to forego any potential benefits of a changing exchange rate, the stability reduces risk and makes it easier to budget within a larger financial plan.

Another option is to negotiate to have the prices set in your domestic currency, meaning any risk then falls on your buyer or supplier who uses a different currency, rather than your business. Different businesses may value using their own currency, so make sure you know how much such a concession would be worth to your business, and what you may be willing to give in order to assure your needs are met in your contract.

Potential exchange rate fluctuations could also be used as a factor when negotiating the overall price. A buyer may be able to use intense fluctuations as part of a strategy to negotiate a lower price, while a seller may use a stable rate to negotiate a higher price.

In some situations, a company may want to purchase an option from a bank or other financial institution, a specific agreement to allow you or your company buy or sell a certain currency at a fixed exchange rate by a specific date. Another similar option would be to sign a futures contract, fixing a rate to exchange one currency for another with a specific bank or institution for a certain date.

3. How can I make sure I receive payments, and don’t have to chase debtors around the world?

It’s bad enough trying to chase someone down who owes you something back in an everyday context, like books they borrowed or their share of a restaurant tab.

Just think of how those issues would become exponentially more complicated when you’re chasing down another person or business in another country, who owes significantly more money.

A debt collection agency can be used if needed, but results cannot be guaranteed and a portion of the reclaimed amount will then be owed to the agency, reducing the amount your business will receive in total.

Receiving some of the money owed to you is certainly better than none, but whenever possible take steps up front to ensure full payment will be made.

While not always an option, the most fail-proof way to ensure you get paid is to guarantee payment from a third party through a confirmed letter of credit or export credit insurance. This way, payment is guaranteed to the seller, even if the buyer is unable to make the full payment, as is the funds will be backed by the bank or agency.

A company can also request full prepayment before delivery when there is a perceived risk of non-payment. It is also possible to negotiate to receive money in installments based on specific actions if concerns about the buyer’s immediate cash flow are part of the discussion.

About the author

Author: FITT Team

The Forum for International Trade Training (FITT) is the standards, certification and training body dedicated to providing international business training, resources and professional certification to individuals and businesses. Created by business for business, FITT’s international business training solutions are the standard of excellence for global trade professionals around the world. View all posts by FITT Team