Foreign Exchange - Trade Products
Trade products come in several forms but the most common one is often where there is a combination of a letter of credit issued against a facility or cash up front, as required by credit departments.
What is foreign exchange trade?
Described simply, a foreign exchange trade finance facility works by reconciling the differing preferences of the exporter and importer:
- As an exporter, you would of course prefer to be paid upfront by the importer (your client) for your shipment. You want to reduce or eliminate any risk that the importer may receive your shipment and not pay you or not pay you in a timely fashion.
- The importer however will have the opposite prospective. Their risk lies in making 'upfront payments' for the shipment and not receiving the goods in timely fashion, receiving goods inferior to what they ordered, or - worst case scenario - the exporter simply pocketing the payment and not completing the order.
How the letter of credit fits into trade products
One solution to reconciling these differing desires in trade finance is through the issuing of a letter of credit.
The letter of credit is opened in the exporter's name by the importer through a bank in his home country.
It essentially guarantees payment to the exporter by the bank issuing the letter of credit upon receipt of documentary proof that the goods have been shipped.
Why is there a need for trade products?
Obtaining a letter of credit obviously requires funds:
- Exporters may require short term loans (trade finance) on the basis of an order they have received and are shipping, but have not been paid for yet.
- Importers have to manage both cash flow and currency fluctuations as well as deal with overseas suppliers (exporters) who expect part or full payment before shipment. As the importer it may be some time before you can on sell the shipment contents and restore your cash flow. In the interim, other fees have to be met, such as shipping costs, marine insurance, and forwarding and clearing.
A short term trade finance loan can solve the issues of both the importer and exporter.
How can Incompass help?
While we do not provide trade finance we are able to assist you with the letters of credit and provide access to excellent exchange rates.
- Market leading forex rates.
- No administration fees.
- ISO 9001 accredited service levels.
- ISO 27001 accredited security levels.
- 100% transparency on all money transfers.
- Tailored services to meet your money transfer needs.