The definition of trade finance and what its product can do for trading

The Definition of trade finance and what its product can do for trading Trading has been in existence for centuries, and that also includes international trade, but the introduction of trade finance has enhanced it further. The growth of international trade witnessed in the past years is largely due to the contribution of trade finance that is being used enormously by a large majority of traders. In simple terms, the trade finance takes care of the divergent requirements of an importer and exporter. An exporter usually expects to be paid up front for the goods or service delivered and an importer’s main concern is that the exporter will pocket the money and simply refuse to ship the goods ordered by him. On the other hand, the exporter’s interests are at risk if he extends credit to the importer as there is the likelihood of the party refusing to pay after receiving the goods.

What is trade finance? The term trade finance translates into “financing for trade” and it can be applied to either domestically conducted business or for international business transactions relevant to trade. In trade, you need two parties that are a seller and a buyer. For trade finance a third party, in the form of a bank or financial institution, steps in to help in the financial transactions that are related to the trade.

Banks offer the most effective solutions to this common problem and that is usually via a letter of credit, which will be operated in the exporter’s name in a bank located in their native country by the importer.

This letter of credit is the guaranteed payment for the exporter, and the bank would issue it after it receives confirmation via documents that the goods ordered by the importer have been shipped. The process may involve bulky document preparation, but to this day it is the most used line of guarantee and trade finance instrument that is the most popular.

Delays or refusal of payment are common occurrences in trading, so no parties involved in a particular business transaction is willing to take the risk of non-payment or non-delivery of goods whether it is an exporter or importer. Banks and financial institutions by extending trade finance via instruments like a letter of credit dispels such uncertainty and allows trading to flourish. There is no doubting banks and financial institutions because they are established and recognized by local and world bodies as trustworthy avenues for money transactions. For safe and sound trading, you will not find a better help than trade finance extended by financial institutions.