How to Overcome Trade Finance Challenges

As any seasoned international trade finance professional could tell you, doing business on global markets is not without its trade finance challenges. Breaking into a new market often involves significant upfront investment. Keeping track of currency fluctuations could be an ongoing concern once you do it.

It is not always easy to secure payment, and chasing down money owed to you or your business could be a real issue. With these trade finance challenges in mind, here are some guides that will help pave your way to success.

How Do I Choose the Best Bank or Financial Institution?

Thinking about taking out a large loan or a financing plan can lead to trepidation. Luckily, taking the right steps before money ever changes hands to select a financial partner that you trust and offer you what you need to decrease many of your concerns. Like many aspects of export and import, a thorough investigation of several options is needed.

It is OK to have a preferred alternative in mind but make sure you don’t miss opportunities elsewhere to benefit your business in the long run. Carefully investigate and compare each option before you make an initial appointment and understand the costs, benefits, and disadvantages of each option. Are you having trouble deciding which of the options to focus on?

References are an excellent option. If a bank or a financial institution has worked well for similar companies, you know, it may be a great way to start your search.

How Can I Minimize the Risk of Foreign Currency Fluctuations?

While fluctuations in the exchange rate may reduce costs, the opposite is the case where a change increases costs that could keep finance professionals up at night. One solution can be to write a fixed exchange rate directly to the contract, along with the price, date, and quantity of the order. This kind of contract is known as a foreign exchange forward contract. While this forces you to forego any possible benefits of changing exchange rates, stability reduces risk. It makes it more accessible to budget in the context of a larger financial plan.

Another option is to negotiate for prices to be fixed in your domestic currency, which means that any risk then falls to your buyer or supplier who uses a currency other than your business. Different companies may consider using their own currency, so be sure you know how much such permission would be worth to your business and what you might be willing to give to ensure that your requirements are met in your contract.

Potential exchange rate changes could also be used as a factor in the negotiation of the overall price. Intense fluctuations may be used by the purchaser as part of a strategy to negotiate a lower price. In comparison, a seller may use a stable price to negotiate a higher price. In some circumstances, a company may wish to purchase an option from a bank or other financial institution. It is a specific agreement that allows you or your company to purchase or sell a currency at fixed exchange rates by a particular date. Another similar alternative would be to sign a futures contract, setting a rate for trading one currency for another with a particular bank or institution for a specific date.

How Could I Make Sure I Receive Payments?

It is bad enough to chase someone who owes you something back to your everyday life, like the books they borrowed or their share of the restaurant tab. Just think about how these issues would become exponentially more complicated when you are chasing down another business or person in another country who owes a lot more money.

If necessary, the debt collection agency can be used. However, the results can not be guaranteed. A portion of the amount claimed will then be owed to the agency, reducing the total amount that your business will receive. Receiving some of the money you owe is certainly better than none.

Whenever possible, take steps upfront to ensure full payment will be made. While not always an alternative, the best way to ensure that you get paid is to secure payment from a third party through a confirmed letter of credit or export credit insurance. In this way, payment is guaranteed to the seller, even if the buyer is unable to make the full payment, as the funds will be backed by the bank or the agency.


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