Blog

Letters of credit are a hugely important part of international trade and import export.  They guarantee payment and allow the seller to receive payment which can be advantageous when capital is needed up front.  Our quick guide below shows you the four most common types of letter of credit and when to use them.

IRREVOCABLE:  Cannot be changed or amended without the consent of both the  buyer and seller.

RED CLAUSED:   Useful when the seller needs an up front funds from the letter of credit, this could be to buy the raw material for the contract. The amount available was usually printed in red ink hence the name.

TRANSFERABLE:  Used by the seller  to purchase the goods of the contract from a third party. It enables the seller  the purchase  the goods   with  the funds from the Letter of Credit. Very useful when the seller is acting as a middle man and has not the personal funds to purchase the goods of the contract

CONFIRMED:  Used when the seller is unsure of the buyers banks ability to honour the Letter of credit. This could be due to Political or financial unrest in the buyers country. The letter of credit is Confirmed by a second bank usually the sellers bank, The confirming bank becomes the prime payer and seeks reimbursement from the buyers bank.

The construction sector is experiencing the fastest rate of hiring for over 15 years, the pound is stronger than it was 2 years ago across 18 major currencies, and countries are beginning to partner on deals which encourage trade globally.

To accommodate this, business funding has become a hot-topic amongst the SME and corporate community, with the rise of alternative debt and equity funders (e.g. the crowdfunding platform Crowdcube and invoice discounting companies such as MarketInvoice).

Yet 70% of businesses are struggling with getting funding, particularly for purchasing goods and services from overseas, which is surprising given the current position of the UK economy.

Sadly, many companies don’t know where to begin when it comes to funding their business, but what doesn’t help, is that business funding is complicated. Depending on the stage of your business, how much capital you already have, how quickly you need the funding and how long you’ll need it for, the funding you require could vary immensely.

Trade finance, an umbrella term for the ‘financing of international trade’, covers a range of financial products which can help importers and exporters trade. International import and export businesses have the added complications of understanding the mechanisms of trade finance, which involves jurisdiction across different countries, language barriers, understanding shipping protocol and insuring their order.

The most common form of trade finance is a Letter of Credit or Bill of Lading, which are both mechanisms to securitise the assets which are being transported or shipped; in other words, the goods or services are the security to which a funder will lend.

For companies looking to import or export, we’ve put together some tips for ensuring success:

1. Do your due diligence

Most business owners in the space will be aware of their competitors in their market, and the competitors of their suppliers. It’s not hard to pull import or export data from government website or through calling local experts on the field. It’s also worth sense checking your suppliers and customers – are they creditworthy and reliable, do they have trusted reviews?

2. Learn about importing and exporting

Aside from a Letter of Credit Trade Finance deal, it’s vital to understand the mechanisms of transporting and shipping – from freight forwarding, to Bills of Lading. It may be a good idea to go on an education course such as ABTS Training.

3. Talk to a broker

Brokers can offer recommendations or suggestions for a business which could save them time and money. Also, because of their established relationships with many funders, they may be able to negotiate a better deal or rate and find the option which is most suitable for your business.

4. Know your risks

Business owners should know from the outset what the risks and challenges are before undertaking a trade finance deal. Mitigating or reducing these risks through insurance, credit checks, independent analysis and understanding the market that they’re operating versus opportunity and financial benefit of a deal can help determine the go-no-go decision.

5. Don’t underestimate the power of negotiation

Whether it’s your customers, suppliers or financiers, negotiation can often be the make or break for your business. Being able to negotiate terms, prices and rates in a competitive market could give your business a financial advantage.

To conclude, raising funding to help succeed in your import or export business is not easy, but can bring unrivaled success and opportunity for your company. Understanding the fundamentals of the import/export market, mitigating risks and planning carefully though are crucial to protect yourself and the company.

Courtesy of our partner Trade Finance Global.  Learn more about trade finance and how it can help your import export business.

Businesses must export their products to a global market if they really want to achieve their potential.  With the Internet and relative ease of building your own website, there is no need to focus only on your domestic market. “How to Export” is a common question and the answer involves some study as there is lots to learn, however we have put together the following infographic to get you started.

Once you know how to export, the bigger question becomes, how do you sell to an international market?  The Internet is the obvious was to reach a global market without needing millions in advertising budgets through traditional advertising.  Out simple guide below explains the basics of getting your website online and key points to marketing: