Reviewed by Aug 27, 2020| Updated on
Products and financial instruments that a company uses in order to support international commerce and trade are referred to as trade finance. Trade finance facilitates exporters and importers to facilitate their trade and business transactions smoother. Trade finance is a broad term which covers several financial products that companies and bankers make use of to make transactions go through with no hassles.
Understanding Trade Finance
The functional wing of trade finance is to bring in a third party to make transactions in order to take out the risk involved in supply and payment. Trade finance offers a means to the exporters to receive payments as per what is mentioned in the agreement when the importer is being provided with a credit in order to stand bt their order. The following are some of the parties that are generally involved in trade finance; banks, insurance companies, exporters and importers, trade finance firms, credit agencies that are involved in export business and service providers.
The trade finance concept varies a lot from traditional credit issuance and financing. Regular financing is utilised to handle liquidity or solvency, while trade financing does not essentially point to a lack of liquidity and funds on the buyer’s side. Trade finance is rather used to save oneself from the risks that are prevalent in international trade activities. The risks involved are the movement of foreign exchange rates, political changes, non-payment of dues, and so on.
Reduction of Risk
If there were to be no presence of trade financing, an organisation might fail to make payments on time and leading to the loss of a valued customer. This may lead to high losses for the company. Having options such as credit facilities that are revolving and receivable accounts will not only help organisations in international trade transactions but also standby them at times of financial crisis.