Trade finance is primarily associated with the monetary or money related activities in both domestic level as well as global or international level trade. The basic requirement like in any other transaction or trade is the availability of two parties. Two parties being the buyer and the seller of goods and assets or the exporter and importer should be present. There are a number of organizations like banks, export credit agencies and other financial institutions that provide trade finance services to both buyer and seller and help in making international trade easy.
Since mostly in case of international trade parties are unknown to each other. Thus, in such a situation the exporter or the seller of the goods might expect the importer or the buyer to pay in advance for the goods or assets being traded. At the same time the importer or the buyer might expect that the payment should be made once the goods or assets have been delivered to the buyer. Thus, to solve the issues related to trust on the other party and the risk of noncompliance, the bank or financial institution steps in providing trade finance services. The goodwill of the bank creates a level of trust between the parties involved in trade.
Trade Finance Services
There are a variety of trade finance products and services that can be availed by the exporter and importer in case of international trade. Today there are a number of banks, intermediaries in trade market and financial institutions that deal in the field of trade finance. These services remove hindrance and ensure safe and smooth functioning of trade transactions for the economies to grow. Some of the various trade finance services and products are:
Buyer’s credit basically refers to an instrument in trade finance market that can be used to get credit for a short term by the importer or the buyer. It usually involves an overseas bank in the process which is known as the funding bank. It serves the purpose of both importer and exporter as it gives on time payment to the exporter on presentation of documents and gives period of time to the importer to arrange money to make payment. Buyer’s credit is no long in operation.
Supplier’ credit is the best replacement of buyer’s credit in the trade market today. It is another short-term trade finance service where the importer or the buyer can avail credit to make payment of the goods or assets imported. As in case of buyer’s credit it also involves the funding bank. However, it doesn’t allow rollover of transactions.
Letter of Credit:
Letter or credit is a form of undertaking that is given by the bank from the importer’s end stating that in case the importer is unable to make payment for the goods, the bank will make payment on his behalf. The bank keeps a guarantee or collateral from the importer and also charges a certain fee for the trade finance service provided.
A bank guarantee is similar to a letter of credit wherein the bank makes a promise to pay on behalf of the beneficiary in case of default. Bank guarantee can be of various types being performance or tender bonds, advance payment, financial, etc.
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