Trade finance refers to the financial instruments and products that are used by companies to facilitate international trade and commerce. It covers many financial products that banks and companies utilize to make trade transactions feasible. Trade finance makes it possible and easier for importers and exporters to transact business through trade. A trade transaction requires a seller of goods and services as well as a buyer, and various intermediaries such as banks and financial institutions can facilitate these transactions by financing the trade.
Some key features of trade finance include:
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Letters of Credit (LOC): A letter of credit is a contractual commitment made in trading by exporters and importers. It is a document issued by a financial institution, guaranteeing that the seller will receive payment from the buyer on time and for the correct amount.
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Guarantees or Insurance: Trade finance can also manifest itself in the form of guarantees or insurance.
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Forfaiting: Forfaiting is a method of trade finance that allows exporters to obtain cash by selling their medium and long-term foreign accounts receivable at a discount on.
The function of trade finance is to introduce a third-party to transactions to remove the payment risk and the supply risk, while providing the exporter with accelerated cash flow. Trade finance can help reduce the risk associated with global trade by reconciling the divergent needs of an exporter and importer. The ultimate goal of trade finance is to be paid fully and on time, and it offers exporters and importers reduced risks on international trade, creating a confident relationship between the two parties.
