Trade finance

Short description: Strategies to facilitate trade

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Trade finance is a phrase used to describe different strategies that are employed to make international trade easier. It 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. Trade finance manifests itself in the form of letters of credit (LOC), guarantees, or insurance, and is usually provided by intermediaries.[1]

## Contents

* 1 Description
* 2 Products and services
* 3 Methods of payment
* 4 See also
* 5 References
* 6 Further reading
* 7 External links

## Description

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 export finance, documentary collection, trade credit insurance, fine trading, factoring, supply chain finance, or forfaiting. Some forms are specifically designed to supplement traditional financing.

Export finance \- When an exporter’s operating cycle (length of time it takes to sell its inventory and collect on its sales) exceeds the credit terms extended by its trade creditors (suppliers), the exporter has a financing requirement. Export finance is needed to cover the gap between when an exporter is able to turn inventory and trade receivables to cash and when it has to pay on its trade payables.[2]

Secure trade finance depends on verifiable and secure tracking of physical risks and events in the chain between exporter and importer. The advent of new information and communication technologies allows the development of risk mitigation models which have developed into advance finance models. This allows very low risk of advance payment given to the Exporter, while preserving the Importer's normal payment credit terms and without burdening the importer's balance sheet. As trade transactions become more flexible and increase in volume, demand for these technologies has grown.

## Products and services

Banks and financial institutions offer the following products and services in their trade finance branches.

* Letter of credit: It is an undertaking/promise given by a Bank/Financial Institution on behalf of the Buyer/Importer to the Seller/Exporter, that, if the Seller/Exporter presents the complying documents to the Buyer's designated Bank/Financial Institution as specified by the Buyer/Importer in the Purchase Agreement then the Buyer's Bank/Financial Institution will make payment to the Seller/Exporter.
* Bank guarantee: It is an undertaking/promise given by a Bank on behalf of the Applicant and in favour of the Beneficiary. Whereas, the Bank has agreed and undertakes that, if the Applicant failed to fulfill his obligations either Financial or Performance as per the Agreement made between the Applicant and the Beneficiary, then the Guarantor Bank on behalf of the Applicant will make payment of the guarantee amount to the Beneficiary upon receipt of a demand or claim from the Beneficiary.

Bank guarantee has various types like 1\. Tender Bond 2\. Advance Payment 3\. Performance Bond 4\. Financial 5\. Retention 6\. Labour 7\. ready for basic analysis

* Export
* Import
* Collection and discounting of bills: It is a major trade service offered by the Banks. The Seller's Bank collects the payment proceeds on behalf of the Seller, from the Buyer or Buyer's Bank, for the goods sold by the Seller to the Buyer as per the agreement made between the Seller and the Buyer.

Supply Chain intermediaries have expanded in recent years to offer importers a funded transaction of individual trades from foreign supplier to importers warehouse or customers designated point of receipt. The Supply Chain products offer importers a funded transaction based on customer order book.

## Methods of payment

Popular methods of payment used in international trade include:

Advance payment\- the buyer arranges for their bank to pay the supplier around 30% of the order value upfront when ordering, and the other 70% when the goods are released or shipped.

Letter of credit (L/C) \- this document gives the seller two guarantees that the payment will be made by the buyer :one guarantee from the buyer's bank and another from the seller's bank.

Bills for collection (B/E or D/C) \- here a bill of exchange (B/E) is used; or documentary collection (D/C) which is a transaction whereby the exporter entrusts the collection of the payment for a sale to its bank (remitting bank), which sends the documents that its buyer needs to the importer’s bank (collecting bank), with instructions to release the documents to the buyer for payment.

Open account \- this method can be used by business partners who trust each other; the two partners need to have their accounts with the banks that are correspondent banks.

Bill of exchange\- is used in international trade to bind one party to pay a fixed amount of money to another party on demand date or at certain point in future.

Documentary Credit\- Similar to LCs, documentary credits provide assurance of payment to the seller. However, unlike LCs, they are issued by financial institutions other than banks.

Priority payment\- in this method funds are being transmitted through secure inter- bank computer network known as SWIFT (Society for Worldwide Inter- bank Financial Telecommunication) or by fax.

## See also

* Supply chain engineering
* Financial risk management § Corporate finance

## References

1. ↑ International Trade Finance - ICC Academy
2. ↑ What is Export Finance?

## Further reading

* Hare, Christopher; Neo, Dora, eds (2021). Trade Finance: Technology, Innovation and Documentary Credits. Hart Publishing. ISBN 9780198854470. OCLC 1237349545. https://www.bloomsbury.com/uk/trade-finance-9781509939933/.

* Grath, Anders (2016). The Handbook of International Trade and Finance (4th ed.). Kogan Page. ISBN 9780749463977. OCLC 730114633. https://www.koganpage.com/product/the-handbook-of-international-trade-and-finance-9780749479542.

* Jones, Stephen A. (2018). Trade and Receivables Finance: A Practical Guide to Risk Evaluation and Structuring. Euromoney Institutional Investor PLC. ISBN 9783319957357. OCLC 1065537254. https://www.euromoney.com/learning/bookstore/trade-and-receivables-finance.

* The Fundamentals of Trade Finance (3rd ed.). Palgrave Macmillan. 2011. doi:10.1057/9780230113264. ISBN 9781647042868. OCLC 1333079357. https://link.springer.com/book/10.1057/9780230113264.

## External links

* "Trade Finance Guide: A Quick Reference for U.S. Exporters", International Trade Administration, U.S. Department of Commerce
* Federation of International Trade Associations

* v
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International trade

Terminology|

* Absolute advantage
* Balance of payments
* Balance of trade
* Capital account
* Comparative advantage
* Current account
* Export-oriented industrialization
* Fair trade
* Foreign exchange reserves
* Globalization
* Import substitution industrialization
* Net capital outflow
* Outsourcing
* Tariff
* Trade justice
* Trade war
* Trading nation

Organizations
and policies

* International Monetary Fund
* UN Conference on Trade and Development
* World Bank Group
* World Trade Organization
* International Trade Centre
* International Chamber of Commerce
* Bilateral investment treaty
* Economic integration
* Incoterms
* ATA Carnet
* Free-trade zone
* Special economic zone
* Trade agreement
* Trade barrier
* Trade bloc

Political economy|

* Free trade (Adam Smith, The Wealth of Nations, Repeal of the Corn Laws)
* Mercantilism
* Protectionism (Economic nationalism, Autarky)

Regional organizations|

| Americas|

* Andean Community of Nations
* Caribbean Community
* Central American Integration System
* Mercosur

|

Asia-Pacific|

* Association of Southeast Asian Nations
* Regional Comprehensive Economic Partnership
* South Asian Association for Regional Cooperation

Europe, Central Asia, and North Asia|

* Customs Union of Belarus, Kazakhstan, and Russia
* Eurasian Economic Union
* European Union Customs Union

Middle East and North Africa|

* Arab Customs Union
* Cooperation Council for the Arab States of the Gulf

Subsaharan Africa|

* East African Community
* Economic and Monetary Community of Central Africa
* Southern African Customs Union
* West African Economic and Monetary Union

Exports by product|

* Aircraft & Spacecraft
* Aircraft parts
* Aluminium
* Cars
* Car parts
* Coal
* Coffee
* Computers
* Copper
* Corn
* Cotton
* Diamonds
* Electricity
* Engines
* Gas turbines
* Gold
* Integrated circuits
* Iron ore
* Natural gas
* Oil
* Petrol
* Pharmaceuticals
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* Steel
* Telecommunications equipment
* Telephones
* Trucks
* Wheat
* Wine

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