Trade Finance and Transport
Trade Finance and Transport are intricately linked in the process of global trade.. In Part 3 of our Trade Finance insight series, James Dinsdale discusses how trade finance and transport are linked..
Once finance has been secured and a transaction conducted, one critical aspect of an international trade venture remains before the buyer can generate profit from their investment; the transportation of the receivable.
The often lengthy journeys goods make across international borders are the primary reason for international firms’ extended finance gaps, and uncertainty around the dispatch, timely shipment and physical security of the goods receivable all create risks for buyers, sellers and investors.
Thankfully, trade financiers can help facilitate these uncertain cross-border transactions and mitigate many of their inherent risks.
Transporting goods from suppliers to buyers across borders can be fiendishly complex. To be successful, it requires a clear strategy, a plan of execution, and forensic logistical oversight. Underpinning this, importers need to choose how their goods will be transported from four options.
For less time-sensitive goods, sea freight’s low cost-to-weight ratio makes it extremely cost-effective for importers. Despite the more cumbersome customs regulations at ports, and the logistical complexities of selecting container options and arranging warehousing solutions, 90% of globally transported goods are transported by sea.
Other options offer increased speed and flexibility at the expense of higher cost or lower capacity. Air freight is often the fastest and safest form of transport, with minimal delays and faster customs clearance compared to other options. However, its high cost-to-weight ratio often restricts its use to cargoes of valuable or time-sensitive goods.
Alternatively, rail freight is a faster but equally lower-cost and consistent option than sea if its physical infrastructure fits a receivable’s planned journey and suitable warehousing arrangements can be made. Otherwise, all three of these options often utilise road freight to complete transportation journeys.
For smaller firms transporting smaller quantities of receivables, a solely road freight option can also be relatively low cost and provide heightened flexibility. Moreover, for certain receivables (such as livestock), road freight remains the only option for guaranteeing the receivable’s condition.
Trade financiers can support firms to execute slick international trade ventures by providing end-to-end support of firm’s venture strategies. Before transporting receivables, both buyers and sellers will need two things; insurance, and freight documentation.
Most transportation insurance products are simple because they are “multi-modal”; they insure goods transported via any method, protecting them from the moment the supplier dispatches them until their arrival with the buyer. Typically, these expire 60 days after the goods arrive at the port of final destination, leaving the buyer a clear time frame to clear the receivable through customs and transport it to them.
In contrast, freight documentation can be complex, with differing customs regulations for different products and borders. It also poses business risk, with both buyer and seller wanting confirmation of shipment and payment respectively before initiating the shipping process.
On the regulatory side, trade financiers can help satisfy regulatory requirements by arranging Certificates of Origin, duty certificates or health certificates for receivables from the requisite bodies. More importantly, as a third party between the buyer and seller, trade financiers can assure buyers and sellers of secure, trustworthy transactions through the use of trade finance tools.
Whether by using letters of credit to release payments from buyers following provision of bills of lading (proving goods have been shipped by suppliers) or by constructing bank payment obligations or performance bonds to unlock payments as parties meet their obligations, trade financiers remove the risks inherent in international transactions facilitated by a shipping process.
Once the transaction is complete and the receivables have been shipped, received and cleared at the port of final destination, the final critical step to executing a venture can be locating suitable space to store and process receivables. Most international trade ventures will involve a quantity of receivables which the buyer cannot store privately either at port or final destination, so a rented warehouse space will be required to store the goods whilst they are sold and subsequently distributed.
In the wake of relentless demand for online shopping, warehousing space is at a premium in the UK, and many ports struggle to find capacity for receivables delivered by commercial freight. Moreover, finding the right warehousing that satisfies a venture’s unique needs can be difficult, as up-front location prices can obscure other inherent transportation, service or security costs not considered by the buyer.
Different types of warehouses will provide different services too; government-licensed “bonded” warehouses cannot release goods until they clear customs, whereas private warehouses apply different release authorities and record-keeping systems depending on their location, the goods, and the trader. Thankfully, trade financiers’ expertise in these areas can help firms pinpoint the warehousing option that best suits their needs.
By assessing firms’ strategies prior to approving trade financing; using their experience to shape firms’ transportation and storage strategies; creating tailor-made financing solutions for different freight transportation methods, underpinned by strong relationships with major freight firms; and executing secure transactions using bespoke trade financing tools, trade financing firms can mitigate the risks inherent in transporting receivables to secure firms international trade ventures. In doing so, they can turn complex opportunities into profitable realities.
For more information about supply chain finance, letters of credit, or support with freight transportation and warehousing, contact Trade Finance Global today.
Article by: James Dinsdale, Writer at Trade Finance Global