Trade Finance Products Are Provided By Financial Institutions to Facilitate Trade
Trade Finance is widely popular amongst traders because it allows for smooth trading while mitigating the usual high amount of risks associated with trading. Banks use different trade finance products to facilitate trading between a buyer and seller which they provide through their branches that deal with trade finance. The following services and products are provided by financial institutions and banks under the label Trade Finance:
Letters of credit A letter of credit is an undertaking by the bank or financial institutions of a promise to pay the seller/exporter on behalf of the buyer/importer - with the condition that the seller submits the documents related to the agreement to the designated bank or financial institution of the buyer. The bank or financial institution specified in the purchase agreement will pay the seller/exporter the agreed payment against consignments.
Bank Guarantee This is also a promise or undertaking provided by the Bank in favour of the beneficiary and on behalf of the applicant. If the applicant fails to meet the obligations of the agreement either by finance or performance then the guarantor bank will make the payment to the beneficiary on behalf of the applicant on receipt of the claim or demand made by the beneficiary. There are various types of bank guarantees offered by the banks and these include Tender Bond, Performance Bond, Advance Payment, Retention, Labour and financial.
Discounting of bills This is the most common service relating to trade that is provided by the banks. Here the bank designated by the seller will collect the payment from the buyers designated bank on behalf of the seller, so that the shipment can be sent to the buyer by the seller as per the agreement executed between them. Trade finance is an important factor in the transaction procedures of almost every trade that most traders complete because of the various benefits offered by the various financing tools. What is trade finance? Trade finance is essentially granted by the banks wherein the bank agrees to guarantee the payment in a trading transaction between a buyer and seller. The guarantee comprises of at least one of the aforementioned tools and depending on their requirement and size of business; traders avail themselves of them as they provide security for their consignment and payment. An
intermediary such as a bank guaranteeing the payment the seller will send the shipment in time and in full and the buyer will also make the full payment because the consignment has arrived in full.