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Trade finance implies for financing for trade, and it covers both international and domestics transactions. In a trade transaction we require both i.e. the seller and a buyer. The various sources i.e. banks and financial institution helps this transaction by finance.
Trade finance constitutes of financial products and instrument which are used by corporates to ease international trade and commerce. With the help of trade finance it is become easier for exporters and importers to transact commerce through trade.
Key Takeaway from the Meaning
• Trade finance constitutes the financial products and instrument which are being used by firms to ease global trade and commerce.
• With trade finance it is easier and possible for exporters and importers to do business transaction through trade.
• The risk associated with the internal trade is being reduce due to the needs of both importer and exporter.
Parties in Trade Finance
There are numbers of parties in the trade finance and we can include the following also
Trade finance firms, banks, Exporters and Importer, Insurers, Credit agencies which deals in export and various services providers.
Trade financing is very different from normal routine finance or credit issuance. Liquidity or solvency is generally managed by normal finance, but it may not be the same in case of trade finance. Generally it’s the taken to cover up the risk which is arise due to international trade i.e. political instability, currency fluctuations, non-payment issue, or the creditability of the parties involved.
Some of the financial instrument which are being used by trade finance
• To help both the importer and exporter bank issue lending lines of credit.
• The risk attached with international trade is being mitigated by letter of credit as the purchaser bank guarantees the payment to the seller for the goods purchase by them. And also the buyer is protected because the payment will not be made to the seller until they fulfill all the terms of the order.
• Working capital or export credit can be issued to exporters.
• Insurance protect the seller from non-payment of money from the buyer and thus insurance can be used.
Some Benefits of Trade Finance
• It reduces the risk: The risk associated with the international trade is being reduced by the trade finance. As there is always some risk associated with international transaction i.e. seller may refuse to send the goods after receiving the advance payment or the buyer may refuse to make the payment once he received the goods so there is a risk in both the side. So with the help of letter of credit the risk of such is being reduce, as the bank take charges to complete the transactions.
• Improves efficiency of operations and cash flow: As the purchaser bank guarantee the payment, and the importer is sure that’s the goods will be shipped so the cash flow is increases.
• Increased revenue and earnings.
• Reduce the risk of financial crunch.
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