Trade finance or export and import finance refers to the capital or funds that are used for trade or for facilitating trade. This finance is mostly used in case of international trade.
Export finance basically means the financial help or assistance that is extended by the financial institutions to traders and business houses and firms for preparing, packaging and shipping goods and services sold outside the country to the destination country or region. Export financing enables businesses to look out for new arenas and spread out at a global level. In order to provide such sort of a finance the banks or institutions require exporters to submit certain documents to ensure that the money is to be utilized for the purpose meant. Export and import financing can be available at various levels or stages of exporting and importing.
Import financing refers to the funds that are used to bring goods from a foreign country or region to one’s own or domestic country or region. Importing transactions can cause a burden on the buyers and importers due to the risks involved. Such type o loans and advances help to reducethe burden and deal with the risk. Increased globalization has increased the avenues of international trade and hence of imports. Importing turns out beneficial to many businesses due to lowered cost, or better quality or by gaining first mover advantages.
Import and export trade or international trade has a number of risks involved when compared to domestic trade namely because the parties may not know each other, there is a risk of fraud, it might be hard to obtain information about the other party, customs and laws are different in two nations and communication might be difficult.
Import and export finance is necessary so that both the importer and exporter are able to deal with the risks involved. There might be a risk of non-completion of contract to both the parties. There might be transaction exposure and financing needs.
The various instruments that enable export and import financing are:
Letter of Credit
A letter of credit is an instrument issued by a financial institution at the request of the buyer of the goods or the importer. The financial institution or the bank agrees to pay the seller or the exporter in case of failure by the importer or the buyer on receiving certain documents. Thus, the trade takes place on the goodwill of the bank involved since the parties are unknown. This reduces the risk of non-completion of the contract.
Draft or Bill of Exchange
A bill of exchange is an order made by one party to be accepted by the other party make payment of a certain amount at a certain point of time. It is a legally enforceable document. A bill of exchange is drawn by the seller of goods demanding payment from the buyer of goods. If it is drawn on the buyer’s bank it is known as a bank draft.If the bill is drawn on the bank of the buyer and the bank accepts it, it is known as a banker’s acceptance.
Bill of Lading
A bill of lading is a document that is issued by the carrier of goods to the seller of goods. It acts as a proof that the goods have been received by the carrier and works as a contract for the responsibility of goods of the carrier. A bill of lading can also be used by the seller to obtain the payment for goods or the promise of payment.
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