Trade Finance

Trade finance is related to international trade.

The term Trade Finance which means, financing a Trade. For a trade to happen, we have a seller to sell the goods and we have a buyer to buy the goods. Various intermediateries such as (banks), (Financial Institutions) can facilitate the Trade by financing the trade.

While a seller (the 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, export factoring, and forfaiting. Some forms are specifically designed to supplement traditional financing. In many countries, trade finance is often supported by quasi-government entities known as export credit agencies that work with commercial banks and other financial institutions.

Since 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 methodologies in the information systems world has allowed the development of risk mitigation models which have developed into new advanced finance models. This allows very low risk payment advances to exporters to be made,while preserving the importers normal payment credit terms and without burdening the importers balance sheet. As the world progresses towards more flexible, growth oriented funding sources post the global banking crisis,the demand for these new methodologies has increased dramatically amongst exporters,importers and banks.

Trade finance refers to financing international trading transactions. In this financing arrangement, the bank or other institution of the importer provides for paying for goods imported on behalf of the importer.

The following are the most famous products / services offered by various Financial Insitutions in Trade Finance

1. Letters of Credit: It is a brief undertaking / promise given by the buyers financial institution to the seller / seller's financial institutions that, it guarantees the payment to seller / seller bank, on behalf of the buyer. In other words, if the buyer defaults the payment, it is the responsibility of the buyers bank to make the payment. This undertaking can be given either in writing or through authroized electronic medium.

2. Bill Collection: It is a major service offered in banks. Seller's Bank collects the payment proceeds for the exported goods, on behalf of the goods from the buyer's Bank.