Export import industry has existed since early days of merchant travelling. The world has become a smaller place with globalization and ease of transport. Faster technology and goods shipped or airlifted have made trading more convenient for exporters and importers alike.
But with convenience comes challenges be it financial or natural. Natural challenges which every industry faces cannot be controlled but suitable precautionary measures can be taken to mitigate their risks. Disaster events like an earthquake, flood, terror attack, etc are not at the hands of the corporate but can damage and cause frustration.
Whereas financial challenges of export and import finance are many which needs to be addressed and appropriate actions need to be taken to reduce their effects and risks.
Few challenges faced during trade finance are
- Political factors
- Sourcing loans
- Forex volatility
- Custom clearances
- Logistics issues
Political factor play an important role in the state of the economy, thus affect the financing terms of the trade. For example, the US-Sino trade war is nothing but a political risk for both the economies and those linked with them. We should keep in mind the commodities which are to be shipped; if they are part of the ongoing trade war terms.
Sourcing the trade loan is equally important as the type of product which is to be sourced decides the loan terms. Even the period of loan is to be kept in mind. Longer tenor loans call for higher interest rates as liquidity isn’t much for that term, whereas short term loan is much more negotiable. The challenge here is to balance the two.
Key reason for many corporate to stay away from trade financing is the volatility in the forex markets. The forex markets work round the clock across the different time zones and this causes unwanted fluctuation in the price of the currency. An event overnight at the US market will cause a suitable change in the local currency markets. Example, the FOMC rate decision which is declared at mid night India time when our markets are closed, but the volatility in the market is felt only when we are open at 9am next day.
Custom clearances are again important and thus it would be wise to know the list of products and commodities which are approved by the respective nation before sourcing for finance on the commodities or products. If the product gets stuck at customs office, then the clearance will eat both time and money. This is a challenge which can be avoided by doing proper homework before sourcing the product. Thus if the right product is sourced, the financing is that much easier and risk free.
Logistics form an important part of trading. First the paperwork has to be precise so that delay in financing is not caused due to this. But at the same time, the route and means of moving the products is to be kept in mind so that there are no delays and the goods are shipped as per schedule.
Processing payments has to be done as per the laws of not just your country but more countries and one needs to keep in mind that the supplier of goods should have efficient system lest it gets the overall cost high, so much so that that cost of financing is questionable.
Above are some of the financial challenges for export and import finance but the solutions are also in sight for many and the need to take appropriate action in order to reduce the above risk is important.
To guard against the above risk and challenges, one has to
Use currency hedging tools for mitigating the currency risk which arise out of trade finance. The good part is that the cost of the financing is known and this hedging becomes relatively easier when compared to trading.
Since there are forex advisory services companies who assist in executing trade financing services at a much cheaper cost and in a safer way, the best way forward is to seek their services. The consortium of banks that they liase with gives an upper hand in getting the best available quotes for each transaction.
Since as a corporate there are many challenges which would be faced but the same can be dealt with as there are others who have gone past these financial challenges for export and import finance. Myforexeye provides the trade financing and forex advisory services to client across the country and providing transparency in an otherwise opaque forex market. Using appropriate hedging tools and ensuring the cost efficient route to finance the trades is our mission. Having authorized by RBI, we offer a range of services through our App which gets the user closer to the forex markets any time of the day.