Trade Effectively with Trade Finance

Trade flows are in flux as companies navigate a world characterised by the widescale reshaping of supply chains. Amid this economic backdrop, trade finance encompasses a range of financial instruments designed to streamline international trade and mitigate the risks associated with cross-border transactions. As companies of all sizes, from small- and medium-enterprises (SMEs) to large corporates, expand, it’s essential that they optimise how they buy and sell goods across markets.

Streamlined trade transactions and payments are essential to growth in today’s environment. This is where trade finance can play an important role, enabling companies to improve their risk mitigation strategies and efficiently access working capital.

A look at the state of trade today

Before we get into the specifics of trade finance - how it works, what the benefits are, and how to go about acquiring it – it’s important to establish why it’s important for thriving in a complex trade environment.

Uncertainty abounds. The global economic landscape has been marked by significant shifts. Geopolitical tensions, trade wars and policy uncertainty have all contributed to a more uncertain environment for international trade. These factors underscore the importance of access to trade finance solutions remain responsive to market shocks.

Yet, global trade continues to grow. 2024 is projected to end with a 2.7% year-on-year increase in global goods trade, while the volume of world merchandise trade is forecasted to grow 3.0% in 2025.¹

This is driven by key trends. Digital platforms and tools are making trade faster and more cost-effective, while trade agreements and an emphasis on supply chain resilience are giving more confidence to businesses looking for stable growth.

Trade finance fits into this landscape by enabling companies to manage risks, stabilise cash flows, and seize new opportunities.

How does trade financing work?

Trade finance safeguards both importers and exporters from potential risks, such as defaults from involved parties. By working with a trusted banking partner such as HSBC, businesses can utilise trade finance to transact efficiently across borders.

This is important because new relationships require time to overcome the initial wariness between the parties. Importers often need to pay suppliers cash advances for goods before shipment, while exporters require this capital as security against non-payment.

Both sides have their own interest in stabilising their cash flows amidst payment gaps. Trade financing solutions provide flexibility in funding and helps facilitate transactions.

How do businesses benefit?

Trade finance offers a wide range of benefits beyond risk mitigation. It not only streamlines transactions but also helps build new supplier relationships, providing the peace of mind needed to explore new business opportunities.

The foundation of trade finance is trust between importers and exporters. By involving a bank such as HSBC to ensure payments are made only after the terms of the agreement are met, trade finance creates an environment where trust can be built and maintained. This trust is crucial for creating long-term business relationships and ensuring smooth transactions.

The advantages of using trade finance continue to grow as more banks and lenders adopt digital trade financing solutions. These solutions offer several key benefits:

• Faster and simpler trade workflow. Importers and exporters can now access a more efficient trade workflow that significantly reduces traditional paper documentation. This allows businesses to spend more time focusing on their core strategies and less time on administrative tasks.
• Just-in-time payments. Digital trade finance enables just-in-time payments to suppliers, providing businesses with more control over their cash flows. This flexibility is helpful for managing working capital and ensuring that suppliers are paid promptly, which can result in stronger supplier relationships.
• Better risk management. By mitigating the risks associated with cross-border transactions, trade finance helps businesses manage their financial exposure. This is particularly important in volatile economic environments where geopolitical tensions and policy uncertainties regularly impact international trade.
• Access to new markets. Trade finance provides the necessary financial support for businesses to explore new markets and expand their operations globally. This is especially beneficial for smaller businesses that may lack the resources to manage the complexities of international trade on their own.
• Improved cash flow stability: By stabilizing cash flows, trade finance ensures that businesses can maintain seamless operations even during payment gaps. This stability is crucial for sustaining growth and competitiveness in the markets they operate in.

Trade finance is therefore designed to help businesses navigate the complexities of international trade and build stronger supplier relationships in the process. In addition, as digital trade finance solutions continue to evolve, the benefits for businesses will only increase, making it easier for them to pursue new opportunities.

Choosing the right trade finance solution

Next, it’s important to understand the range of available solutions, each tailored for a specific purpose. Every business should understand their needs so that they can optimise the solutions the use. HSBC provides a range of options for businesses to consider:

• Letters of credit. An undertaking by a buyer’s bank to pay suppliers for goods or services, subject to agreed conditions. It provides increased protection against cross-border transaction risks, ensures timely payment, and facilitates easier access to working capital finance.
• Guarantees. Enables negotiation of favourable terms with buyers and suppliers by protecting them from non-performance under a contract while addressing financing needs. This can take the form of advance payment, tender, warranty and financial guarantees.
• Lines of credit and trade loans. Lines of credit are preset and enable borrowing until the credit limit is reached, allowing access to funds under this limit at any time. Trade loans are generally short-term loans that enable better responsiveness to business opportunities and release of capital, both before and after the shipment of goods.
• HSBC TradePay. A simplified, digital trade finance solution that provides businesses with instant access to loans and enables just-in-time payments to suppliers. It also offers more control over the timing of trade payables and gives full visibility of finances anytime, anywhere.
• Documentary collections. A solution that works after goods are shipped by a supplier. The supplier presents the necessary documents, along with instructions, to their bank, which forwards the documents to the buyer’s bank for payment. With a Documentary Collection against payment, import documents are released upon payment. With a Documentary Collection against acceptance, documents are released against a promise to pay.
• Import and export financing. Utilises any of the options detailed above to provide specific protections for importers and exporters.

Taking care to select the most suitable trade finance option can result in smoother and more efficient transactions, stronger supplier relationships, and greater financial stability even during periods of volatility.

How to apply for trade finance

Once the type of trade financing is chosen, applying generally involves several steps. Through HSBC’s tailored solutions, businesses can enjoy a streamlined application process.

Assessment and selection. Begin by determining the financing amount you need and selecting the trade finance solutions that best suit your business requirements. This step involves a thorough evaluation of your financial needs and the specific trade finance products available.

• Negotiation. Discuss with your bank to on the fees and terms of the trade finance solutions. This step is important because the terms should be favourable and align with your business objectives.
• Submission of documents. Prepare and submit the necessary transaction documents. HSBC TradePay allows you to complete this process digitally, making it more efficient and less time-consuming.
• Credit assessment. Your bank will assess your company’s creditworthiness. This evaluation is for determining your eligibility for the trade finance solutions and to set the terms of the financing.
• Issuance. Once the approval process is complete, you will receive the trade financing instruments. These instruments are the financial tools that will facilitate your trade transactions.
• Transaction execution. Execute the transaction based on the agreed-upon terms. This step involves carrying out the trade activities as planned, using the trade finance instruments provided.
• Repayment. Finally, repay the financing according to the agreed-upon terms. Ensure that all outstanding balances are settled once the transaction is complete to maintain a good credit standing and facilitate future trade finance applications.

These steps provide a comprehensive overview of the process of applying for trade finance, although solutions such as HSBC TradePay can proceed through these steps quickly and provide near immediate access to funds.

Opening up opportunities for growth

By providing financial support, trade finance can help businesses manage their risks and maintain healthy levels of cash flow. Whether it’s an SME looking to expand into new markets or a large corporate looking to optimise its supply chain, trade finance can play a critical role in keeping a businesses primed for growth.

Moreover, as a business expands its common for their trade financing needs to evolve in parallel. Whether its establishing relations with new suppliers or selling in markets with unfamiliar regulations, there are no shortage of risks and uncertainties to consider.

HSBC stands ready support businesses with reliable trade financing solutions, helping them stay ahead of the curve in global trade and pursue new opportunities with confidence.