An Overview of Trade Finance and How It Helps Traders
Whether you are engaged in the import and export business or simply trading you will no doubt need the services of trade finance at some point as it an important tool devised to solve all funding issues relating to trading businesses. What is trade finance? Trade finance covers all types of financing for trade and is applied to both local and international trade exchanges. Trade transactions comprise of two parties that of a buyer and seller, and intermediaries such as financial institutions and banks help the two parties conduct transactions smoothly by financing them. In the world of trade, there is always an element of risk involved - such as an exporter or seller wanting the buyer to pay for the goods in advance before they are shipped or similarly the buyer could ask for the entire shipment to be delivered before making the payment. This may cause a dilemma that the parties involved would never be able to resolve and here is where the financial institutions step in and clear the way for both of them. For example, the bank could provide support to the importer by issuing a letter of credit to the seller or exporter who can submit the document to the bank and collect payment after delivery of the goods has been made. The bank of the exporter can also advance loans to the seller on the basis of this contract acquired from the buyer as well. There are several forms of trade finance and these include trade credit finance, documentary collection, factoring or forfeiting. Some of these modules are specially designed to supplement more conventional finance. Other forms of trade finance include Documentary Collection, Trade Credit Insurance, Factoring or Forfeiting. The security of the Trade Finance agreement will depend upon the verifiable and also the tracking of the events involving physical risks in the chain of events between the importer and exporter. The advancement of information technology has hugely reduced the risks involved in trading as its communication aspects have developed favorable risk mitigation models which are very much up to date. These machinations have hugely reduced the risks for the buyer on making an advance payment to the exporter. This also does not have an adverse impact on the balance sheet of the importer and the normal credit terms are preserved. Import finance hugely facilitates the aspirations of a buyer as it guarantees the full delivery of the goods as the Seller will ship the whole order quicker as the payment has already been assured by the bank through one of its credit modules.