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Finance services

Finance services

Various global trade finance services are available in the market which can be categorised as per short term to medium to long term finance products. These are the methods of financing in international trade

Letter of credit

One of the oldest or we can say most common form of short-term global trade finance a is the letter of credit.

The LC is provided by the importer bank to the exporter (or exporter’s bank). The document specifies: “I’ll pay you the specified amount when you ship the right goods to me.” In this manner the supplier takes the payment risk in the presence bank (this is because bank risk is lower than corporate risk.)

Exporter get paid after presenting correct documents with the bank i.e. proof of shipping the correct goods, bill of lading and other specified documents Quite often, the transaction involves confirming bank which confirms the LC provided by the importers bank. They verify all the documents (proof of export against the LC requirements) and then pay the supplier the due amount.

Structured trade and commodity finance

This is used to finance high value supply chains. These tend to be long term trade finance even sometimes up to five years.

It includes various methods of finance for producers and traders of goods. These are

  • Pre-export finance Financing a company so that the exporter can pay from manufacturing to delivery of goods. Moreover provides a company a means of raising money.
  • Borrowing base facilities: Facilities are credited that are secured by current assets.
  • Revolving credit facilities: It can be considered as a type of borrowing facility which is drawn by the borrower and can be paid back as needed and benefits by extra flexibility
  • Warehouse financing: A loan given to a manufacturer or processor of goods being held in a warehouse as collateral (security). Depending upon the choice goods can be held in a public warehouse or in the borrower’s warehouse, but will be managed by a third party (a collateral manager).

Documentary Collections

It is a type of transaction where the supplier entrusts the payment regarding the sale from his bank, which sends the documents that the importer needs to show to his bank, with instructions to provide the buyer with necessaries for payment. Then importer receives the funds and remits them to the exporter via banks which are involved in the collection and in exchange of the documents. This method involves use of draft where the importer has to pay the face amount either at sight or within the specified time or on a specified date. D/Cs are expected to be less expensive than LCs.

Export and agency finance

Export credit agencies (ECAs) are public but government owned agencies which are available to provide government backed loans and guarantees insurance for exporters from their home country who are seeking to do overseas business.

ECAs help to promote the exports by insuring global trade transactions that take place in risky markets.

An ECA’s role is limited to guaranteeing transactions, and one can have more than one ECAs to guarantee the deal having different parts and involves exporters from various countries. However, more and more ECAs are providing direct loans.

At both pre-shipment and post-shipment stages it provides credit facilities and techniques of payment.

Trade credit and political risk insurance

There are a number of private insurance companies that provides insurance protection against credit and political risks to clients which includes banks and other financial institutions, suppliers and buyers, traders and foreign investors. It protects against non-payment.

Political risk insurance also protects against non-payment which occurs due to exposure to political events, including acts of terrorism and war and other political violence. It also covers the risk of payments that cannot be made due to actions by a foreign government.