5 Tips for Small Businesses Exploring Trade Finance Options


For anyone starting or running a small import/export business, looking into trade finance options is a logical step. After all, according to the World Trade Organization (WTO), as many as 80-90% of world traders utilize this convenient method of handling the financial side of the business. The main appeal of trade finance is that it enables the company owner to pay the supplier on time through the involvement of a third party which provides the money and ensures more secure transactions. If you’re exploring viable trade finance options for your small business, here are some tips to help you make a sound decision. 

Evaluate the future return on investment 

Prior to making any sizable investment, taking the time to estimate the return on investment (ROI) and consider all the risks is essential. Ordering too many products paired with investment rates from a trade finance option can be a slippery slope leading to bankruptcy. For that reason, you need to approximate how much stuff you need to generate enough ROI and avoid getting stuck in debt. Also, keep in mind that the interest rate will usually depend on the amount of money spent on the orders, meaning that the higher the loan, the lower the rate is going to be. Producing accurate estimations and educated guesswork can be tricky, so it would be wise to hire a financial advisor to help you with the calculations, which can make your business more profitable in the long run. 

Consider different types of trade finance solutions

It’s important to note that there are multiple types of trade finance solutions. Therefore, doing some research and looking into each option is a salient step to ensure that you choose the one that would benefit your business the most. There are different kinds of institutions that offer trade finance services, and more often than not, the range of financial products and services they offer differs as well. These institutions include companies that specialize in trade finance, banks, export credit agencies, and so on. The products and services these financial service providers may supply are letters of credit, insurance, invoice scanner, factoring, and more.

Carefully pick the trade finance provider

Having conducted careful and in-depth research about the various types of trade finance and having found the one best suited for your business, it’s time to scout for an appropriate trade finance provider. Probably the most time-efficient way to do this is by making a list of prerequisites arranged by priority so that you can rule out unsuitable candidates right off the bat. For example, if your aim is to find a reputable trade finance company, you can visit the websites of such companies and note down those that match your criteria. Then, you should contact those firms to gather more information, which will allow you to narrow down your picks. Finally, even if you are certain that you’ve selected the best candidate, take your time to read and comprehend every aspect of the contract down to the very last detail before solidifying your choice.

Employ legal and financial experts to look over the contracts

Getting stuck in unfavorable, legally-binding contracts can be detrimental to any business, let alone a small one. Thus, to avoid getting blindsided by some bitter surprises, carefully reading any legal document before signing is crucial. Since even by scrutinizing every word, an untrained eye may overlook some key points, it’s highly advisable to hire a legal and financial expert to oversee the contracts. They will be able to tell you if the contract is fair and beneficial for you, as well as whether there’s anything you should be wary of, and possibly, how to negotiate a better deal.

Understand the pros and cons of trade finance

Financial calculations are made in order to provide enough money for the event

Following the previously mentioned tips will help you mitigate the risk of opting for a trade finance solution that is inadequate for your particular business. Undoubtedly, trade finance comes with a series of perks. It allows you to choose from a variety of financial options, instead of relying on the credit line that your vendor offers, making it more cost-efficient in most cases. What is more, this financial solution can shield you from potential issues, such as fluctuations in currency and not receiving payments from the customers. Nevertheless, you should still take into account all the possibilities before reaching the final decision on whether trade finance is the most practical solution for your business at this stage. 

A final note

In sum, opting for a trade finance solution that is suitable for your small business requires a bit of time management, planning, estimation, and research. In order to make a sensible choice, you need to acquire some knowledge on what kinds of trade finance exist, how to choose the provider of this service, and what it can do for your company, as well as recognize its limitations. Only then can you rest assured that you’re getting the best out of trade finance and enjoying all the perks. 

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