Services

Trade Finance is a specific topic within the financial services industry. It’s much different, for example, than commercial lending, mortgage lending or insurance. A product is sold and shipped overseas, therefore, it takes longer to get paid. Extra time and energy is required to make sure that buyers are reliable and creditworthy. Also, foreign buyers – just like domestic buyers – prefer to delay payment until they receive and resell the goods. Due diligence and careful financial management can mean the difference between profit and loss on each transaction.

All sellers want to get paid as quickly as possible, while buyers usually prefer to delay payment, at least until they have received and resold the goods. This is true in domestic as well as international markets.

Increasing globalization has created intense competition for export markets. Importers and exporters are looking for any competitive advantage that would help them to increase their sales. Flexible payment terms has become a fundamental part of any sales package.

Selling on open account, which may be best from a marketing and sales standpoint, places all of the risk with the seller. The seller ships and turns over title of the product on a promise to pay from the buyer.

Cash-in-advance terms place all of the risk with the buyer as they send payment on a promise that the product will be shipped on time and it will work as advertised.

Today, open account terms with extended dating are becoming more common despite the dangers.Trade finance provides alternative solutions that balance risk and payment. 

The two broad categories of trade finance:

• Pre-shipment financing to produce or purchase the material and labor necessary to fulfill the sales order; or
• Post-shipment financing to generate immediate cash while offering payment terms to buyers. 

Political risk, especially in developing markets is often considered as a significant investment restriction. Companies which are able to manage such risk are better protected against dangerous expropriation, government payment delays, cancellation of import and export licenses. Furthermore, they are able to suggest and implement strategies which help to manage the risks.

Following risks, amongst others, have to be considered by responsible investors, funding entities and executive management when preparing strategic and business plans. It is imperative that they are considered at all phases of their implementation.

London Market offers risk analysis of the territory, state or particular region within the country, so that the investor / exporter can identify and manage all the political and credit risks relating to the transaction.

Also researching the consumer-base of market is very important. Businesses that invest time researching the consumer-base for their products increase their chances of succeeding in the international marketplace. Researching potential markets can help you specify market segments, identify where your product is most likely to sell, determine both domestic and international competitors and establish a fair market price for your product. 

Conducting a systematic market search takes time, but normally pays off in the long run. Considering many of the factors involved with exporting in the beginning will save you from misfortunes in the end.

The current international political situation often makes the process of international and investment transactions difficult. A primary risk factor is a unstable political environment, especially in developing countries where there is the threat of war, revolution, strikes or other riots.

Furthermore, the main policy instruments which threaten the property and also the very existence of economic are expropriation, confiscation, and revocation of licenses, changes in price regulation and the inability to repatriate the profits.

The protection of employees is also important. An increasing threat of kidnapping people is becoming an instrument of worldwide terrorism. International insurance markets offer an effective solution to these problems. The solution to the threat of terrorism is insuring the risks that simplify the decision making process and enable the fulfilment of objectives, despite the adverse conditions of the current political and economic environment.

High-quality insurance with a high international rating also allows financing of a particular project by banks or an equity investor.

Political risk insurance is specialized insurance for companies doing business or conducting operations in foreign countries. The insurance addresses the business exposures to loss faced by these companies as a result of governmental action either foreign or domestic.

London Market provides consulting and advisory services in the area of financial services and risk management. London Market has expertise in the areas of export finance, cross-border investment and international transactions, including strategic credit/political risk management.

Credit risk is the possibility that either one of the parties to a contract will not be able to satisfy its financial obligation under that contract. The classic example is that of one commercial enterprise extending credit to another enterprise or individual. Many insurance arrangements, especially finite risk programs, also involve varying degrees of credit risk—on both sides of the transaction—depending on the financial stability of the parties.

Export credit insurance is an effective sales tool that enables you to extend competitive payment terms with confidence. It can help you penetrate new markets, negotiate larger order quantities, establish or expand distribution, and increase the profitability of your export business. If you finance your receivables, the coverage will also make your foreign A/R more attractive to banks, factors, and other lenders so you can negotiate the most favorable advance rates and loan terms. 

An exporter or importer is obliged to provide an offer, advanced payment or guarantee. There is the risk that the recipient would not meet the conditions of the contract whether on its own or as a result of a political superior power. Banks issuing bonds may insist on proper coverage of credit risk of their clients.