The services related to trade finance offered by banks and financial institutions constitute the following.
Buyers credit: Short-term credit given to an importer (buyer) from overseas lenders such as banks and other financial institutions for goods it is importing. Overseas banks lend credit to the importer based on a letter of comfort (a bank guarantee) issued by the importer’s bank. Buyers credit helps local importers gain access to cheaper foreign funds that may be closer to the London Interbank Offer Rate (LIBOR) rates, as against local sources of funding which are more costly.
Letter of credit: is a written agreement by the importer’s bank (issuing bank) on behalf of its customer, the importer promising to effect payment in favor of the exporter up to a declared sum of money, within a prescribed time limit and against specified documents.
Pre-shipment: means any loan or advance permitted or any other credit allowed by a bank to an exporter for financing the purchase, processing, manufacturing or packing of goods before forgoing shipment, on account of a letter of credit opened, by an overseas buyer or a confirmed and irrevocable order for export of goods.
Post-shipment: means any loan or advance granted or any other credit provided by a bank to an exporter of goods/services from the home country from the date of realization of export proceeds.
Factoring and forfeiting: It is a form of export financing. Factoring refers to a financial arrangement where the firm sells its trade receivables to the factor (bank) and receives the cash payment. Forfaiting is where the exporter sells the claim of trade receivables to the forfeiter and gets an immediate cash payment. They differ on the basis of the type of underlying consideration and the credit period given to the importer.
Bank guarantee/ standby letters of credit (SBLC): A guarantee issued by a bank on behalf of its customer, the exporter, as a financial assurance to the importer to be collected in the occurrence that the exporter fails to pay on certain stated contractual obligations.
After the RBI banning the usage of letters of undertaking (LOUs) to provide buyers credit, Indian importers were hit massively. To gain access to the overseas funding, the market has reverted to supplier’s credit. Myforexeye was the only company that helped importers during fall time with the most convenient combination of technology and import funding through suppliers credit and standby letter of credit. We have recently introduced sell side services; they are Local currency bill discounting (LCBD) or foreign currency bill discounting (FCBD) and Factoring. Utilize trade finance services from Myforexeye to unlock hassle-free business.
Trade Finance Solutions
International trade is the exchange of goods, capital, and services across international borders. Trade finance is the furnishing of any form of financing that sanction a trading activity to occur. Trade financing could be made directly to the supplier, to enable him to procure items to produce, or for immediate sale, and/or for storage for future activities. It could also be provided to the buyer, to enable him to meet contract obligations. Whichever way financed the underlying principle is that the party is able to bear the risk through reimbursement source facility. In general, trade is built on trust. Everyone relies on the honesty and integrity of those in the trading cycle, however, there are always adverse elements that could upset the cycle, this is where the bank can intervene and help to assist the trust gap.
The risks involved in international trade finance are, country risks include political stability, economic environment, the legal system, forex risks and commercial risks include dependability and trade disputes. Furthermore, International trade activities involve extra expenditures, forcing firms to count on external finance. Also, additional trade costs due to duties, freight insurance, shipping cost, and international delivery might take longer to complete the transaction. This results in the need for working capital.
Therefore, banks, governments, and financial institutions have created various instruments to provide trade finance solutions. These instruments are used and handcrafted to satisfy the needs of importers and exporters. Trade finance instruments are Buyers credit, Supplier credit, Cash credit/ Overdraft facility, Pre-shipment/ post-shipment credit in foreign currency (PCFC), Bill discounting/ factoring / forfeiting, and Bank guarantee/ standby letters of credit (SBLC).
Today trade finance is linked to the story of human trade evolution. To remain competitive in today’s changing environment, both clients and financial institutions have streamlined their trade activities. Firms are looking to reduce costs and improve efficiencies in a big way. The pain points in international trade with trade finance services on the buyer side include No clear understanding on counterparty, Shipment delays, time-consuming paperwork, the possibility of fraud, and the possibility of damaged goods on receipt. The concerns at seller’s end include no clear understanding on the counterparty’s credibility, No assurance of payment at the time of shipment, the possibility of delayed payments or no payments, and delay in receiving acknowledgment of receipt of goods.
Read more about export and import finance
10 Dec 2019 05:19 PM
Most of us understand the importance of the global interest rate benchmark LIBOR – London Inter-Bank Offered Rate, especially when millions of dollars are benchmarked against it for decades since 1984.
29 Nov 2019 02:16 PM
Ideally a trade constitutes a foreign exchange transaction but currency can be traded without any underlying which makes it a risky proposition.
26 Nov 2019 12:29 PM
Foreign exchange risk is a financial risk which exists when a home currency is converted into another during the transaction.
14 Nov 2019 02:54 PM
A foreign exchange transaction is recorded in the books of accounts at an exchange rate though the payment is made at a different exchange rate. This leads to transactional foreign exchange loss or gain.
07 Nov 2019 10:48 AM
Modern foreign exchange market started its shift from a fixed exchange rate to a floating exchange rate system. Thus a global decentralized, over the counter (OTC) market for trading of currencies evolved which determines the forex rates.
29 Oct 2019 05:00 PM
Trading in the financial markets is what increases the volumes especially when some markets are open across the borders over different time zones. Each market has its underlying asset which is tradable over the exchange.