According to a recent study by the World Trade Organization, a whopping 90% of global trade is reliant on trade finance. That is a staggering number, but when you really start to think about it, it makes sense. After all, international trade is a minefield. Even the slightest hit to a nation’s economy could spell disaster for its unprotected trade deals. Trade finance serves as something of an insurance policy and provides an anecdote to many of the risks associated with international trade, especially in a country such as the United Arab Emirates, which some buyers and sellers remain skeptical of. But what exactly is trade finance and how can it benefit you? Read on to find out.
An Alternative to Banks
Dubai is full of agencies offering trade finance services. The most reputable of these agencies serve as something of an alternative to a bank. While a bank may abuse the needs of a seller or buyer for their own gain, a trade finance agency will work with that seller or buyer to help them secure funding from the most suitable party. Rates remain more or less the same and advice is often offered to ensure the client’s deal is as successful as possible.
Letters of Credit
One of the most common tools trade finance agencies use to secure funding is the letter of credit. A letter of credit - which is also available from a bank - is issued to the seller by the buyer’s chosen financial institution. It ensures the seller will be paid once they have fulfilled their side of the deal. This builds trust between two parties who may not know each other and provides a firm foundation upon which a business relationship can be built.
Import Insurance
When an importer purchases goods from an exporter, they are taking a risk as they must then accept the burden of turning a profit from reselling the same goods. This would make many importers balk if not for import insurance. Import insurance allows the importer to pay a portion of their purchasing costs upfront and the remaining balance only after they have turned a profit. The best financial institutions could even secure a deal allowing the importer to defer payment entirely until a profit has been raised.
Export Insurance
Export insurance serves a very similar purpose to import insurance. When export insurance is secured, an exporter can sell to a foreign buyer safe in the knowledge that they are protected in the event of non-payment. Most export insurance deals provide wide-ranging coverage, so any money lost through a shipping mishap is protected just as much as money lost via the buyer simply not paying. Export insurance is particularly useful to sellers in the United Arab Emirates, where deals are often delayed due to the nation’s distance from Western countries.