Trade Finance

Wate is Trade Finance ?: 

The term "Trade Finance" means finance for Trade and it contains both domestic and international trade transactions. For any trade transaction, there should be a seller to sell the goods or services and a Buyer who will buy the goods or use the service. There are various intermediaries such as banks and financial institutions facilitate these transactions by financing the trade.

Description:

In this transaction, trade form works by reconciling the divergent needs of an exporter (the seller) and importer (the purchaser). While an exporter would prefer to be paid upfront by the importer for an exporter shipment, the risk to the importer is that the exporter may simply pocket the payment and refuse shipment if the exporter extends credit to the importer, the latter may refuse to make a payment or delay it inordinately. To reduce the risk, the importer may wish to require the seller to document the goods that have been shipped and the exporter requires any guarantee to get his payment on time.

For these, various 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.

 

Forms of Trade Finance:

1.       Open Accounts

2.       Advance Payments

3.       Documentary Collections

4.       Letter of Credits

5.       Guarantees (Standby letter of credit)

6.       Factoring

7.       Forfaiting

1. Open Account: An open account transaction means that the goods are shipped before the due date. Once goods received by the buyer then only he makes payment to the seller. Usually, goods are shipped and delivered before payment is due usually in 30-90 days. In this type of trade, there is huge credit risk of payment and the bank does not take any guarantee of making payment to sellers.

2. Advance Payments:  To avoid seller credit risk, the seller and buyer make an agreement. The buyer talks to their bank and the bank provide payment to the seller by getting all the shipment documents. Later once shipment received by buyers, the bank settles the amount with buyers with some extra charges.

Documents Collections: The term “Trade Finance” means Finance for Trade. For any transaction, there should be a seller to sell the goods and services and buyers who