Why Trade?
Foreign trade clearly holds down the cost of products we buy. — Tim Bishop
At this stage, you may be thinking to yourself, why bother with trade? It’s messy, complicated, and doesn’t seem like it’s worth all the trouble — we live in a digital, on-demand world. Surely there is a better way.
Unfortunately, the answer is “No”, there is no better way. First of all, there isn’t a single person, company, or country in the world that can produce every conceivable product in the world by themselves. Secondly, even if there were a mythical entity that could do everything by itself, it would certainly not be the cheapest solution available to any buyer. Whether you like it or not, trade is inevitable.
Now as to how its financed, here we can see there’s more wiggle room. To pay for trade, a person can always use cash, borrow from the seller, or borrow from a bank. All these are reasonable alternatives to each other and can be applied to a variety of situations in the marketplace. When it comes to certain kinds of trade, however, the practicalities of buying and selling sometimes requires the use of one kind of financing structure over another. Let’s take a look at three transactions: buying a candy bar from a corner store, buying candy bars from a local distributor, and buying candy bars directly from the factory in Belgium.
When you’re simply buying a candy bar from your corner store, more often than not, you’re using cash to purchase the candy. The trade transaction begins and ends within the store and is completed simultaneously. You could go through the hassle of trying to arrange credit with the shopkeeper, or arranging a bank loan to pay for the candy bar, but more often than not, paying for the candy in cash is the easiest, cheapest, and quickest way to get your candy.
Now let’s scale it up. For the shopkeeper, buying candy from the local distributor is a bigger purchase because he’s buying a few cases of candy. And because the shopkeeper has a running business, this transaction is likely to be repeated every week. The shopkeeper can also use cash to pay for the candy from the distributor. However, because of the amount of money involved, and because of the regularity of his business, it’s also possible for the shopkeeper to ask the distributor to provide him with a supplier’s credit of one month. The shopkeeper can get the candy now but pay the distributor a month from now. Supplier credit is preferable because it gives the shopkeeper a month to sell the candy, collect cash, and pay off the distributor. It’s also possible for the shopkeeper to arrange for a bank loan to purchase the candy, but once again, the hassle of trying to arrange a bank loan for a few cases of candy is probably not worth it.
Finally, let’s scale it up even further and look at the distributor who has to buy enough candy for all his customers directly from the factory. The problem with a cash payment is that the volume of money involved is likely so huge that the distributor may not have that kind of cash sitting around. The same applies to the candy producer, who cannot afford to wait for payment from all of its distributors, so supplier’s credit may be a risky proposition. In this situation, it’s worth the effort to go through the process of applying for bank finance to buy the candy. Banks, who are sitting on cash, don’t feel the pain in providing payments to suppliers immediately while they can also afford to wait for buyers to conduct business and pay them back in the future.
The latter two transactions really highlight the need for trade finance in the world today. Without some form of trade finance supporting companies, global trade relies on cash which is hugely impractical for a wide variety of reasons, not least of which is that cash isn’t always available to everyone. Hopefully, now you’re beginning to understand the general ballpark of where Bonorum fits.
This blog post is the fourth in a mini-series looking at Global Trade Finance. For more posts on trade finance and the Bonorum Platform:
Part 1 — Introduction
Part 2 — What Is Trade?
Part 3 — Trade Finance Instruments
Part 4 — Why Trade?
Part 5 — Problems With Trade Finance
Part 6 — An Example
Part 7 — Digitizing Trade
Part 8 — Sow Me The Yield!
Part 9 — What’s Bonorum?
Part 10 — Meet The Team
All articles and posts have been written and produced by team members of the Bonorum Platform. Click here to learn more about Bonorum and how it can help you as business or as an individual.
