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Trade finance instruments to navigate export trade

BY Kudzi Magwenzi

Venturing into export trade seems like a minefield of uncertainties especially for small to medium enterprises, however the globalised economy provides solutions to ease the risks involved in international trade.

Understanding the payment system is crucial for Zimbabwean exporters to be able to participate fully in the globalized economy and comply with regulatory requirements. To facilitate international transactions, various payment methods are employed. These methods ensure the smooth flow of goods and services across borders while minimizing risks such as credit, currency, and political risks.

Trade finance instruments help establish trust and confidence between trading partners, particularly in cases where there is limited or no prior experience with each other. This trust is crucial for businesses to enter new markets and expand their global reach.

By mitigating the risks associated with international trade, trade finance instruments can help reduce the logistical costs associated with cross-border trade. This can make trade more attractive for businesses and contribute to the overall growth of international trade.

The use of trade finance instruments can help promote stability in global markets by facilitating trade and mitigating the risks associated with cross-border transactions. This stability can help businesses and governments make informed decisions about their international trade strategies.

Consult your authorised dealer for the following options or more.

  1. Letter of Credit (LC)

A Letter of Credit is a contractual undertaking by the importer’s bank to pay once the exporter ships the goods and presents the required documentation to the exporter’s bank as proof. As a trade finance tool, Letters of Credit are designed to protect both exporters and importers. This method of payment is popular due to its security and predictability. However, they can be time-consuming and expensive to set up.

  • Documentary Collections

Through a process known as “documentary collection,” the importer’s bank transfers money to the exporter’s bank in return for documentation tracing the transported products. Exporters authorize their bank to act as a collection agency for the payment of items shipped to the purchase in this trade transaction.

Collections are quicker than letters of credit and save transaction costs. However, since a financial institution does not guarantee payment, the exporter is exposed to credit risk.

  • Bank Guarantees

A bank guarantee is a financial instrument issued by a bank to guarantee the performance of a specific contract or obligation. This instrument is often used in cases where the buyer and seller do not have an established business relationship or where the transaction involves a significant amount of risk.

  • Export Credit Insurance

Export credit insurance is a financial instrument that protects businesses from the risk of non-payment by their international buyers. This insurance covers the costs of unpaid invoices and can be obtained from private or government-backed insurance providers.

  • Factoring

Factoring is a financial instrument in which a business sells its accounts receivable to a third-party factor, usually a financial institution. The factor then collects payment from the buyer, less a fee, and remits the proceeds to the business. Factoring is commonly used by small and medium-sized enterprises (SMEs) to access the necessary capital for international trade.

The Reserve Bank of Zimbabwe provides guidelines for export administration to ensure that Zimbabwe receives fair and true value from its exports. “Goods may be exported, when an advance payment for the goods has been made through the formal banking channels or will be so made within the prescribed three months (90 days) from date of export, or when contractually due, or such other period as Exchange Control may prescribe. Ensuring that export proceeds are received for Zimbabwean enterprises goes beyond the business scope as failure to remit back proceeds as described attracts penalties for the exporter. By utilizing these instruments, businesses can ensure that they have access to the necessary capital and resources to support their international trade activities, ultimately contributing to the growth and success of their operations.

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