Any international trade that is financed by banks or financial institutions is defined as Trade Finance. The international transactions include a willing buyer of goods and services and a seller of these goods and services and a bank or financial institution to finance the trade. This financing of international may include facilities like issuing letter of credit, lending or financing, factoring, export credit and insurance to provide cover to the cost of goods.
Different companies are inter-dependent to culminate an international trade and these companies include importers and exporters as the vital players. These two players are supported by banks and lending institutions, export credit agencies, insurers and different service providers.
GLOBAL IMPACT OF TRADE FINANCE
Trade finance has become one of the main economic players of world economy and the main chunk (80 to 90 %) of international business is dependent on trade financing, these are the figures quoted by World Trade Organization (WTO).
Facilitation of trade finance by international banks and financial institutions has revolutionized the trade business. The tremendous expansion and growth of international trade has been due to the availability of internationally financing. For example an importer can easily open up a letter of credit with only 25 % down payment of the total cost of order placed for the imports. The bank finances the remaining balance of 75 % to help import the goods.
MECHANISM OF IMPORT AND EXPORT
International trade involves an importer of goods and an exporter of these goods. The usual form of communication between these two parties is correspondence, telephone or internet. The two parties rarely meet or see each other. The element of business trust is missing. The importer’s concern is to ensure that the goods are worth the money paid and an exporter prefers to be paid up front. Neither party is willing to take the risk. The importer is afraid that the exporter may not ship the goods or ship poor quality goods. Similarly, the exporter is afraid that the importer may abuse the credit extended to import and delay or refuse to make payment.
A solution to address these issues is to issue a letter of credit in the name of the exporting company. The letter of credit is opened in the country of the exporter and is a guarantee to the exporter that the payment shall be released upon producing export documents that the goods have been shipped to the importer.
Sourcing of goods from U.K and from international suppliers is mostly carried through this process.
WHY TRADE FINANCE?
It provides flexibility to you to place an order with an increased buying power and not to short-strap your business.
It provides a safety net to your business deal; the exporter knows that the bank shall only release the payment upon receiving documented proof that the goods have been shipped as per order.
Conversely, the exporter is confident that the payment is with the local bank and shall be released upon fulfilling the requirements of the business terms.
Trade finance can help you become an international trader.