Supporting Business Success in the Era of Globalization with Trade Finance

Globalization has created both immense opportunities and challenges for businesses in Indonesia. As the world becomes more interconnected, companies have access to new markets and can expand their reach exponentially. However, they also face heightened competition from foreign players. In light of these trends, trade finance has become an indispensable tool for enterprises seeking to succeed globally.

Trade finance plays a critical role in driving globalization and economic growth by enabling cross-border commerce. According to the WTO report, between 80-90% of world trade relies on trade finance such as letters of credit and export credit insurance. However, access remains a challenge - over half of trade finance requests by SMEs are rejected worldwide, compared to just 7% for multinationals.

In developing regions like Southeast Asia, the gaps are even more pronounced. The unmet demand for trade finance in Africa and developing Asia is estimated at $700 billion. In Indonesia specifically, SMEs face obstacles in securing the financing needed to connect with overseas buyers and markets. Yet proper access to trade credit from banks could unlock the potential of Indonesian SMEs to expand exports and integrate into global value chains.

Bridging these trade finance gaps provides tangible benefits. The WTO finds that increasing access in developing countries would create up to $1 trillion in new trade. As globalization accelerates, trade finance will be a critical tool for Indonesian companies to access new opportunities and compete globally. This article provides an in-depth look at how to harness trade finance to support business success in Indonesia in the era of globalization.

International trade involves time lags between shipment, delivery, and payment. Exporters want payment upon shipment, but importers prefer to pay only after receiving the goods. This creates a gap that can deter trade. According to the WTO, only 20% of trade is paid in cash in advance. To bridge this gap, some form of credit or payment guarantee is essential - enter trade finance.

Trade finance refers to financial instruments that facilitate cross-border commerce by mitigating payment risks and providing working capital. The most common are

• Letters of credit (PDF, 176KB) - a bank payment guarantee to the exporter
• Export credit insurance, which covers risks like non-payment.
• Other instruments include factoring, forfaiting, and supply chain finance.

Banks play a vital role by providing businesses with access to trade finance products and services. For exporters, these instruments provide security and ensure liquidity to fulfill orders. For importers, trade finance provides more flexible payment options. By bridging the timing gap, trade finance oils the wheels of global trade.

Globalization presents both opportunities and challenges for Indonesian companies seeking to expand overseas. While it opens doors to new markets and partnerships, it also brings risks and intensifies competition. Key challenges include:

1. Increased foreign competition - Globalization enables international players to enter the Indonesian market more easily. Local firms must compete with these foreign brands and their advanced technologies
2. Currency fluctuations - As businesses operate across borders, they are exposed to exchange rate risks and currency volatility. Sudden currency swings can diminish profits.
3. Accessing new markets - Exporting to faraway markets involves costs like logistics, marketing, and distribution. Indonesian SMEs often lack the financial capacity and connections to overcome these hurdles.
4. Geopolitical uncertainty - Events like trade wars and political instability can disrupt global supply chains, crimp demand, and create unfavorable business climates.
5. Adapting to regulations - Each country has its own regulatory requirements, licenses, tariffs, and quotas that Indonesian companies must adhere to. Lack of familiarity can lead to compliance issues.

Trade financing is a valuable tool for Indonesian businesses to overcome these globalization challenges, tap into overseas opportunities, and manage risks prudently.

Trade finance is the lifeblood of global commerce, enabling companies of all sizes to smoothly conduct cross-border transactions. By mitigating risks and facilitating payments, trade finance solutions empower businesses to trade confidently worldwide. This section explores key trade instruments that underpin international trade, beginning with solutions for importing and exporting goods.

Import and Export Solutions

When importing or exporting goods, companies face a range of risks and financing needs at different stages of the transaction process. Trade finance offers solutions tailored to the unique requirements of international trade, including:

Letter of Credit

Letters of credit (LCs) are one of the most common trade finance instruments for import transactions. With an LC, the importer's bank provides a guarantee of payment to the exporter upon the presentation of specified documents. This alleviates the risk of non-payment for the exporter. LC arrangements are customizable to meet the needs of the transaction, including sight LCs for immediate payment and usance LCs for payment at a future date.

Documentary Collection

Documentary collections offer a more affordable option for securing payment, with the exporter's bank acting as an intermediary to obtain acceptance or payment from the importer upon submission of documents. As the risk of non-payment stays with the exporter, this method is best suited for transactions with trusted partners.

Avalisation

Avalisation is a process in which a bank adds its guarantee to a bill of exchange or a promissory note issued by an importer or an exporter in favor of their trading partner. This enhances the creditworthiness and security of the instrument, as the bank becomes liable for its payment in case of default by the original issuer.

Export Forfaiting

On the export side, forfaiting is used to sell receivables from export sales to a forfaiter at a discount from face value. This accelerates cash flow for the exporter. Export documentary collections enable the exporter to use their bank to obtain payment from the foreign importer.

Ship Guarantee

A shipping guarantee is a document issued by a bank on behalf of an importer that allows them to take delivery of the goods from the carrier before receiving the original bill of lading from the exporter. This helps to avoid delays and demurrage charges that may arise due to discrepancies or late arrival of documents. The bank holds the importer liable for any loss or damage that may occur to the goods or documents during this period.

Financing against Avalised / Co-accepted Bill

Financing against avalised or co-accepted bills is another form of short-term financing where a bank or a financial institution provides a loan or an advance to an importer or an exporter based on the bills of exchange that have been guaranteed or accepted by another bank or financial institution. This reduces the risk and increases the value of the bills of exchange, making them more suitable for financing.

Global Trade Loans

Trade loans are flexible, short-term borrowing facilities linked to specific import or export transactions. They work as fully revolving credit facilities, which help fund a business between the time it has to pay for the purchased goods and the time when the firm receives the funds from the sale of those goods.

Trade loans such as pre-shipment and post-shipment financing provide working capital to exporters and importers.

1. Pre-shipment loans enable exporters to fulfill production and shipment costs prior to receiving payment from the foreign buyer.
2. Post-shipment loans offer importers financing for a period after the goods have shipped until the final payment is due.

Trade loans allow firms to pay suppliers on time while receiving extended credit terms. However, the loan period may be short-term

Structured Trade Finance

Structured trade finance works by bringing trade finance products from across the supply chain together so that they have a coherent structure. The types of finance and security packages available to a borrower can vary widely, leading to many different types of structured trade finance. Some major types available:

1. Supply chain financing allows buyers to extend attractive credit terms to their suppliers, while suppliers can opt to receive early payment from the buyer's bank at a discount.
2. Receivables finance is a type of financing where a seller sells its receivables (invoices) to a lender at a discount in exchange for immediate cash.
3. Inventory finance is a type of financing where a borrower uses its inventory (stocks) as collateral for a loan.
4. Countertrade is a type of trade where goods or services are exchanged for other goods or services instead of cash.
5. Tolling financing is a type of financing where a processor pays a toll (fee) to use another party’s facilities or equipment to process raw materials into finished products.

Structured trade finance differs from conventional lending in that it relies more on the underlying assets and cash flows of the transaction rather than the creditworthiness of the borrower. Moreover, it provides benefits such as lower interest rates, longer repayment terms, higher borrowing limits, improved liquidity, and cash flow management.

Bank Guarantee (BG)

Bank guarantees (BGs) and standby letters of credit (SBLCs) are used in international trade to provide security to parties if certain obligations are not fulfilled. BGs and SBLCs function similarly to a guarantee that payment will be made if the client fails to perform as per the underlying contract terms. These instruments help facilitate trade by reducing risks for exporters, importers, and their banks.

The wide range of trade finance solutions available today provides businesses with significant flexibility to select options that suit their specific business needs and challenges. With the right mix of risk mitigation, financing access, and cash flow benefits, trade finance empowers companies to navigate the intricacies of global trade and drive cross-border business growth.

Trade finance is a vital tool for Indonesian companies that want to succeed in the global market. However, it is not a one-size-fits-all solution. Different types of trade finance products and services have different features, benefits, costs, and risks. Therefore, SMEs and MNCs in global trade need to adopt smart strategies to optimize their trade finance performance and maximize their impact. Here are some tips for doing so:

Choose a Bank with Extensive Trade Finance Expertise

Indonesia's complex trade financing landscape calls for an experienced navigator. As companies aim to maximize the potential of trade finance solutions, having the right banking partner is key to unlocking access, efficiency, and strategic advantage. Leading Indonesian business banks like HSBC have dedicated trade finance units with global reach and capabilities. An experienced trade finance bank will have access to a wide range of instruments and tailored structures to meet unique needs. It will also have technologically advanced platforms for seamless documentation and communication.

Master Incoterms and Allocate Risks Intelligently

Mastering Incoterms is key when structuring cross-border contracts. Incoterms are commercial terms published by the ICC that define buyer and seller responsibilities for costs like insurance, freight, duties, etc. Common terms are EXW, FOB, CIF, DAP among others. Appropriate Incoterm selection based on intimate understanding helps Indonesian firms optimize cost allocation, minimize risks, and avoid misunderstandings. For instance, under FOB, the exporter's responsibility ends at the shipment port, transferring transit costs and risks to the importer thereafter. On the other hand, DAP keeps such costs with the exporter up to the buyer's door. Prudent Incoterm usage provides a strategic advantage in international trade, especially when backed by trade finance solutions.

Bridge Working Capital Gaps

Export orders often require upfront investments for production, labor, and materials before payment is received. Importing also involves large cash outflows for shipment, duties, etc. before sales income. This creates working capital gaps that can constrain Indonesian companies from fulfilling orders and financing growth. However, trade finance offers solutions that essentially "bridge the gap" between outflows and inflows across the transaction cycle. Instruments like packing credit, pre-shipment export finance, receivables factoring, and post-import financing provide the working capital to mobilize exports and imports seamlessly. For example, post-import financing allows delayed payment on shipments via letters of credit, freeing up cash flow to sell inventory. Export factoring accelerates cash conversion from invoices to bankroll production.

As globalization accelerates, sophisticated trade finance solutions level the playing field for Indonesian enterprises seeking overseas expansion. By bridging working capital gaps, mitigating risks, and enabling flexible payment terms, trade finance empowers businesses to access new markets confidently. With the proper banking support, Indonesian companies can leverage appropriate international trade finance solution to unlock their full potential in our increasingly interconnected world.