The world is no longer a mix of isolated countries, as modern advancements and connectivity have made it into a global village, where people can traverse the length and breadth of our beautiful planet. Trade was perhaps the biggest factor which helped improve global connectivity, bringing people into contact with new cultures and traditions. A major part of trade today, is finance, making trade finance a key term which influences the way our world functions.
Trade Finance – What is it?
The single biggest factor which impacts trade is money, and lack of finances would result in a trade which accomplishes nothing. Trade typically involves exchange of goods or services between two people, the seller and the buyer. Trade finance is a banking term which essentially describes the financial relationship which exists between the parties concerned in a particular trade activity.
Example – Mr. Ram is a fruit exporter from India who mainly exports his produce to Australia. The importer in Australia is Mr. Lee, who has been purchasing these fruits for the last 6 months. Now, since there is no history associated between these two, it is unlikely that either of them will let go of the fruits or the money until a financial agreement is reached. Towards this end, Mr. Lee’s bank provides a letter of credit to Mr. Ram, stating that payment will be initiated as soon as the fruits land in Mr. Lee’s possession, thereby financing trade. Conversely, Mr. Ram could take a loan from his bank to finance this export based on the letter from Mr. Lee.
Trade Finance – Who provides it?
Trade is a lucrative profession, helping the economy of a country grow to new heights. Now, not all countries are equally blessed with natural resources or commodities, making trade the only way for them to enjoy certain products. Trade finance offers a chance for a number of entities to indirectly participate in this growth, helping them ride the global wave towards success. Estimates indicate that billions of dollars’ worth of trade takes place on a daily basis, offering a great opportunity for enterprising organizations.
Some of the major providers of trade finance are mentioned below.
- Banks – Banks are, without doubt the most preferred destination for people involved in trade. Almost all major banks offer this service, albeit at a slight cost, but their reputation and quality have ensured that people still come to them for financial support.
- Trade houses – There are a number of organizations which finance trade and while they might charge more than banks, it is also possible to avail funds easily.
- Government agencies – A number of countries have government backed agencies to help finance trade.
- Suppliers – Sometimes the supplier can choose to offer a line of credit to the seller, thereby assisting in trade.
- Buyers – If a strong relationship exists between a seller and a buyer it is possible to get financial assistance based on word of mouth.
Trade Finance
Trade Finance – Who use it?
The world exists on the “Give and Take” formula, and for every service provider we have a corresponding user. The major users of trade finance include individuals who are directly involved in trade, for whom this finance means the difference between success and failure. Some of the common users of trade finance are mentioned below.
- Goods manufacturers – Manufacturing is a lucrative industry which essentially survives on credit. Manufacturers rely on trade finance to get the raw material for their business.
- Importers – An importer deals with a large quantity of products, and relies on delivery of the product to make any money.
- Producers – Producers also rely on trade finance to meet their daily requirements.
- Exporters – Exporters rely on trade finance to get an assurance that the goods they send will be paid for, thereby helping them sustain their business.
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