Financing of International Business

Understanding the Basics

Trade financing refers to the financial activities that are necessary for trade transactions of a business when it takes part in global trade.
It is critical because trading on an international level poses additional risks, including variations in exchange rates and political instabilities.
Methods of payment utilised include cash-in-advance, Open account, documentary collections, and Letters of Credit.

Exchange rates refer to the value of one currency for the purpose of conversion to another.
These rates fluctuate regularly due to factors like inflation, interest rates, political stability, and economic performance.
Businesses are exposed to foreign exchange risk when they have to deal in foreign currencies. They can hedge these risks using various financial instruments.

Export credit agencies (ECA) are country-backed institutions that provide financing for domestic companies’ international activities.
Multinational corporations (MNCs) may source financing from the global market, accessing funds in the country where they are cheapest or most available.
Businesses can rely on trade credit, where goods and services are delivered but payment isn’t collected until after a specified period.
Companies sensitive to foreign exchange rates risk might utilise currency futures contracts: legally binding contracts to buy or sell a particular currency at a future date.
Forfaiting is a form of financing where companies sell their accounts receivables to a forfaiter at a discount in exchange for cash.
Factoring involves a business selling its accounts receivable to a third party (called a factor) at a discount to accelerate cash flow.

Commercial banks provide a variety of services such as letters of credit and foreign exchange transactions to aid international trade.
International Financial Corporations (IFCs), like World Bank, offer loans to businesses in developing countries for their projects.
International Monetary Fund (IMF) and World Bank help stabilise the international financial system and foster global monetary cooperation.