To finance and manage the financial risks of trading, businesses use a combination of loans, letters of credit and insurance.

Letters Of Credit
Short Term Finance
Export Credit Insurance

• Before you export a particular shipment of goods, ask for a Letter of Credit (L/C). This is a letter of undertaking from the buyer's bank to pay an exporter, through the exporter's bank, for goods on behalf of the buyer.
  
  
• This gives the exporter the assurance that goods will be paid on delivery. It also means the importer does not need to pay for the goods before they have been delivered. As an exporter, you should try not to export your goods without first opening an L/C.
  
  
• An L/C is also used as a convenient means of payment in international trade and opens up other financial facilities such as:
  

  Back-to-Back Letter Of Credit

  • An exporter may want to request this from his bank if he has to obtain goods from a third party for export.
    
    
  • It is opened on the same terms and conditions as the original L/C.

  Trust Receipt

  • An importer can get a loan from a bank based on the L/C and the goods it promises he will be getting.
    
    
  • Funds can be borrowed against the future sale of those goods.

  Packing Credit

  • With a L/C, you can get an overdraft or loan for a particular shipment of goods. It can be a form of:
    

    • pre-shipment financing - repayment is made when goods are shipped OR
      
      
    • post-shipment finance - repayment is made when the buyer has paid for the goods

• As a trader you might need financing on a short-term basis, for instance, sellers might need to offset the purchase of goods they are paid.
  
  
• You can get external financing in a number of ways:

  Overdraft

  • An overdraft (or line of credit) offered by banks is the most common method for obtaining funds quickly and easily.
    
    
  • Traders overdraw their current account up to a maximum amount agreed with the bank. Interest is paid only on what is overdrawn.
    

  Revolving Credit Agreement

  • Traders can arrange with a bank to have an agreed amount of funds made available to them.
    
    
  • They can withdraw and top up the funds regularly. For this, they pay the bank a fee in a lump sum or a percentage of the average unused balance.

  Term Loan

  • If a trader can provide some form of collateral, such as a property, he/she can apply for a bank loan.
    
    
  • Before granting the loan, the bank will consider factors such as its relationship with the trader, the trader's credit history, the purpose, amount and duration of the loan, and the trader's cash flow to repay the loan.

  Transaction Loan

  • When traders receive a firm order for their goods, they can approach the bank for a transaction loan to buy materials and pay for expenses for that particular order.
    
    
  • The more well-known and credible the customer placing the order, the more favourable banks will be in granting the loan.

  Factoring

  • Exporters can make use of factoring companies to get cash. A factoring company takes your unpaid invoices of goods and collects on your behalf.
    
    
  • This way, the exporter gets paid upfront and does not need to wait for the goods to be delivered or take the risk that the customer may not pay.
    

  Inventory Financing

  • Traders with unsold stock can approach finance companies to provide them funds using the inventory as collateral.
    
    
  • This is given on a revolving basis so as to encourage traders to make inventory sales to repay funds.
    
    
  • Sometimes the finance companies require the trader to agree to a factoring arrangement before granting the loan.

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