Trade finance is facilitating financial needs in international trades. It involves an exporter who requires immediate payment and an importer who looks for credit. It also reduces risks like currency fluctuations, non-payment issues, and creditworthiness in the international trade transaction.
During the early days, exporters have never been able to make sure whether importers pay for the goods. On the other side, importers are worried since there is no guarantee that exporter will send the product of good quality without any delay. Trade finance ensured that exporters are paid on time and importers are assured for shipment of goods.
Trade Finance Process
Trade finance facilitated by banks and other financial establishments for different transactions between importers and exporters. Trade Finance Services covers different kinds of activities like issuing a letter of credit, lending, forfeiting, export credit and finance, and factoring. The trade finance method involves different parties like importer, exporter, financing institution, credit agencies, and insurers.
Trade Finance Products and Services
Letter of credit
It is an undertaking given by bank on behalf of the importer to an exporter, that, if the exporter presents the complying documents to the importer’s designated bank as specified importer in the agreement then the importer’s bank will make payment to the exporter.
It is an undertaking given by the bank on behalf of the importer and in favor of the exporter. The bank acts as a guarantor if importer or exporter fails to fulfill the terms and conditions of the contract; the bank takes an initiative to pay a sum of money to the beneficiary.
Supplier’s Credit is used by an importer to extend their payment by using LC and in the meantime exporters paid immediately after shipment of goods. By going so, both exporters and importers can manage their working capital effectively. It is also called supply chain finance.
Exporters can get funding from factoring service providers against their accounts receivables post shipment. The importer will make payment to the factoring service provider after his credit period gets over. This product is without collateral and without recourse.
Read more about Export and Import Finance