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What is Trade Finance ?
Trade finance signifies financing for trade, and it concerns both domestic and international trade transactions. A trade transaction requires a seller of goods and services as well as a buyer. Various intermediaries such as banks and financial institutions can facilitate these transactions by financing the trade. The main function of trade finance is to introduce a third-party to an ongoing transaction to remove the payment risk and the supply risk while providing the exporter with receivables according to the agreement and the importer with extended credit. Suppliers, banks, syndicates, trade finance houses and buyers all provide trade financing.
While a seller (or exporter) can require the purchaser (an importer) to prepay for goods shipped, the purchaser (importer) may wish to reduce risk by requiring the seller to document the goods that have been shipped. Banks may assist by providing various forms of support. For example, the importer's bank may provide a letter of credit to the exporter (or the exporter's bank) providing for payment upon presentation of certain documents, such as a bill of lading. The exporter's bank may make a loan (by advancing funds) to the exporter on the basis of the export contract.
Other forms of trade finance can include Documentary Collection, Trade Credit Insurance, Finetrading, Factoring or Forfeiting. Some forms are specifically designed to supplement traditional financing.
Banks and financial institutions offer the following products and services in their trade finance branches.
Trade finance is the financing of international trade flows. It exists to mitigate, or reduce, the risks involved in an international trade transaction.
There are two players in a trade transaction: (1) an exporter, who requires payment for their goods or services, and (2) an importer who wants to make sure they are paying for the correct quality and quantity of goods.
As international trade takes place across borders, with companies that are unlikely to be familiar with one another, there are various risks to deal with. These include:
To reduce these risks, banks – and other financiers – have stepped in to provide trade finance products.
Popular methods of payment used in international trade include:
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