Trade Finance: At the Forefront of Global Trade
We have been reviewing the trade finance as the global business finance and export finance markets since the year 1983. The fundamental letter of credit, highly structured bond, and debt ECA financing are the main things which constitute trade finance.
For 3% of the global trade banking services, The trade finance accounts worth some $3tn per year. , we can say that trade finance is the financing of trade in the life cycle of the company. The life cycle of the company includes the sending of goods and services, a variety of financial instruments. Trade finance includes export finance and credit agencies, letters of credit, and invoice finance and receivables. Band guarantees are also part of trade finance.
What is Trade finance?
Trade finance is both a science and an imprecise term which covers a number of activities. We can say it is a precise managing the capital required for the flow of international trade. In terms of science, there are wide range of tools which determine how the credit, cash, investments, and other assets can get used for the Trade Finance Services.
In simple words, we can say that an exporter requires an importer to get prepaid trade finance for the goods shipped. The importer wants to mitigate the risk of supply by asking the exporter for the document of shipment of goods. The importer’s bank helps the exporter by providing him the letter of credit assuring about the payment by presenting the specific documents of payments like the bill of lading. Based on the export contract, the bank of exporter can make a loan to him. The type of document depends upon the nature of the transaction and the evidence of the performance of the contract made between exporter and importer. Business people should know that banks only deal with the documents, not with the actual goods and services and performance of the contract.
Providers of Trade Finance
- Syndicates
- Banks
- Trade finance houses
- Supplies
- Buyers
Buyers and sellers use trade finance when they require financial services to assist both of them with the gap of trade cycle funding. Both of them can even choose trade finance as a form of risk mitigation. To get effective trade finance, the financier requires:
- Exporter and importer have to control the use of funds and control the goods and repayment sources of funds
- They both have to check and monitor the trade cycle through their transactions.
- Importers and exporters have to secure the goods and receivables.
Trade finance helps the businessmen in settling down the conflicts of payment between the exporters and importers. An exporter always wants to reduce the risk of payment from the importer. Trade finance helps the exporters to get the receivables from importers. On the other hand, importers want to reduce the risk of supplies from the exporter. Trade finance helps them to receive extended credit on the payment made by importers. The main function of trade finance is to act as a third party between the exporters and importers to remove the risk of payment and supply. In other words, we can say that trade finance provides the accelerated receivable to exporters and extended credit to importers.
Users of Trade Finance
Trade finance covers many sectors some of which are given below;
- Importers
- Traders
- Manufacturers
- Exporters
- Producers
Trade Financing Includes:
- Lending facilities
- Letter of credit
- Export credits
- Export factoring
- Forfeiting
- Insurance
*Export factoring is the financing of companies against the invoices or accounts receivables
*Forfeiting means purchasing the traded goods or receivables from an exporter
*Export credits means to mitigate the risks to investors while providing the trade chain finance
*Insurance covers the risk and exposure of currency during the delivery and shipping of goods.
Importance of Trade Financing
We can also say supply chain and export finance for the word trade financing. Trade financing is a massive driver for the development of the economy, and it helps in maintaining the credit flow in the economy of the nation and supply chains. Around 85% of the global trade finance solutions depend upon the trade and supply chain finance, which is estimated at USD 10 trillion in a year.
The Benefits of Trade Finance at TFG
- It facilitates the growth of business in the economy.
- Trade finance increases the potential of revenue and higher margins
- It brings more efficiency in trades and supply chains
- Trade Finance helps to reduce the risk of payments and supplies from the sides of importers and exporters, respectively.
- It helps in diversifying the supplier network.
- Trade finance helps in reducing the risk of bankruptcy.
Conclusion
Many small and medium enterprises play a significant role in running the MNC’s and large companies in relation to export finance, trade, and supply chain. Small and medium enterprises need access to business banking and finance to accomplish large contracts, create wealth and jobs, import goods from overseas, and develop the economy.
