Skip to main content

Insights by Cathay

Overcoming the challenges that can occur with trade financing

Trade finance can be a smart option for companies, to help manage working capital and balance growing the company, purchasing goods and stocks, and streamlining operations. This reduces gaps in the pay cycle, allowing the company the ability to offer more competitive terms to suppliers and customers. Generally, trade finance options last for up to 180 days and are considered a short-term financing option.

But trade finance comes at a price. Any business that has engaged in trade financing knows it is a nuanced and complicated process. Still, that process can be streamlined.

Challenges corporate businesses encounter when utilizing trade financing

One of the most egregious risks of international trade is payment risk. How does the exporter know they will be paid in full on time? Will the importer actually get the goods they ordered? Either the importer or exporter could have a poor credit rating or a history of non-payment. Because of these risks, trade finance products are invaluable in the protection they provide.

Another major consideration is country risk. Trade financing takes place on an international level, which means exchange rate, language barriers, and political risk must be taken into account. For instance, some countries may not be a good place to export to due to political or economic unrest.

Resources and tools to assist with trade financing

Trade financing can be complicated, but specific strategies and solutions can help address those challenges. The top tools to leverage include:

  • Commercial Letter of Credit: A contractual payment undertaking that is issued on behalf of the buyer. This covers the full amount of credit and provides assurance to both the buyer and the seller that the transaction will be fulfilled.
  • Bill Discounting: A way for the seller to get earlier payment on its unpaid invoice, which are due at a future date of the credit.  
  • Trade Accounts Receivable Credit Insurance: Provides protection against default and bankruptcy.
  • Accounts Receivable Factoring: When a business sells its accounts receivables to another company that specializes in buying receivables at a discount (i.e., the factor).
  • Government Offerings: Using government export agencies’ programs to expand to new foreign markets and protect accounts receivables.

Each of these strategies is only as effective as how you put it into practice. When reviewing trade finance options, make sure that the trade specialist you are working with supports the strategy, approach, and currency your business uses. It's important that your bank supports your goals and has experience in this nuanced space.

How Cathay Bank addresses trade financing challenges

At Cathay Bank, we take an intentional approach to supporting businesses and their needs to overcome the challenges of trade financing so clients won’t have to lose out on opportunities. During the U.S.-China trade tensions and COVID-19 pandemic, for example, we stayed in touch with our clients, listened to their issues, and supported them with longer-term trade financing.

Trade financing is a complex but worthwhile endeavor as long as you work with a reputable and experienced specialist that understands the space. Contact Cathay Bank today to learn more about how these solutions could streamline the process for your company!



Related Link:

This article does not constitute legal, accounting or other professional advice. Although the information contained herein is intended to be accurate, Cathay Bank does not assume liability for loss or damage due to reliance on such information.

Share This Article:

Social share image