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Trade finance


Trade finance is related to international trade. While a seller (the exporter) can require the purchaser (an importer) to prepay for goods shipped, the purchaser (importer) may wish to reduce risk by requiring the seller to document the goods that have been shipped. Banks may assist by providing various forms of support. For example, the importer's bank may provide a letter of credit to the exporter (or the exporter's bank) providing for payment upon presentation of certain documents, such as a bill of lading. The exporter's bank may make a loan (by advancing funds) to the exporter on the basis of the export contract. Other forms of trade finance can include Documentary collection, trade credit insurance, export factoring, and forfaiting. Some forms are specifically designed to supplement traditional financing, such as transactional equity (a product developed by IIG Capital LLC), which can assist the borrower in funding the down payment required by a bank before it extends credit.[1] In many countries, trade finance is often supported by quasi-government entities known as export credit agencies that work with commercial banks and other financial institutions. Since secure trade finance depends on verifiable and secure tracking of physical risks and events in the chain between exporter and importer, the advent of new methodologies in the information systems world has allowed the development of risk mitigation models which have developed into new advanced finance models. [citation needed] This allows very low risk payment advances to exporters to be made, while preserving the importers normal payment credit terms and without burdening the importers balance sheet.[citation needed] As the world progresses towards more flexible, growth oriented funding sources post the global banking crisis, the demand for these new methodologies has increased dramatically amongst exporters, importers and banks.[citation needed] Trade finance refers to financing international trading transactions. In this financing arrangement, the bank or other institution of the importer provides for paying for goods imported on behalf of the importer.

1. Export finance {2}

What is export finance? Exporting activity often places a strain on exporters cash flow reserves as goods have further distance to travel, meaning the working capital thats essential to funding new orders and growing the business is tied up for longer. Export finance overcomes these demands, as export solutions such as preshipment finance and post-shipment finance cater for a range of funding requirements, ultimately allowing your business to trade without damaging its cash flow.

What are the benefits of export finance?

Each export finance solution can be tailored to meet a business specific international finance requirements. Pre-shipment finance and post-shipment finance helps to fund exporting activity before your business receives payment. Funding can be advanced in the favored currency to mitigate any fluctuations in exchange rates. Export finance companies will have a specialist knowledge of the overseas countries in which you operate.

Is export finance right for my business? There are a number of export finance solutions available to help facilitate your exporting activity, while each one can be tailored to meet your business specific funding requirements: Pre-Shipment Finance Pre-shipment finance releases funding to accommodate the transit of goods before the exporter receives payment by providing up to 50% of the order value. Post-Shipment Finance Post-shipment finance advances capital upon the shipment of goods, bridging the gap in the interim whilst awaiting payment.

2. Import finance {3}

What is import finance? The delays and complications associated with trading overseas can be a great burden on an importers cash flow. Import finance specializes in overcoming these challenges, leaving working capital free to invest into growing the business. There are traditionally four distinct methods of paying for overseas goods and raw materials: advance payments, letters of credit, documentary collection and open account trading, with each one carrying its own cash flow benefits.

Parties to Letters of Credit {4} Applicant

Applicant is the buyer of the goods or services supplied by the seller. Letter of credit is opened by the issuing bank as per applicant's request. However, applicant does not belong one of the parties to a letter of credit transaction. This is because of the fact that letters of credit are separate transactions from the sale or other contract on which they may be based. Beneficiary

Beneficiary is the seller of the goods or the provider of the services in a standard commercial letter of credit transaction. Letter of credit is opened by the issuing bank in favor of the beneficiary. Issuing Bank

Issuing Bank is the bank that issues a letter of credit at the request of an applicant or its own behalf. Issuing bank undertakes to honor a complying presentation of the beneficiary without recourse. Nominated Bank

Nominated bank is the bank with which the credit is available or any bank in the case of a credit available with any bank. Advising Bank

Advising bank is the bank that advises the credit at the request of the issuing bank. An advising bank that is not a confirming bank advises the credit and any amendment without any obligation to honor. Confirming Bank

Confirming bank is the bank that adds its confirmation to a credit upon the issuing bank's authorization or request. Confirming bank may or may not add its confirmation to a letter of credit. This decision is up to confirming bank only. However, once it adds its confirmation to the credit confirming is irrevocably bound to honor or negotiate as of the time it adds its confirmation to the credit. Even if the issuing bank fails to honor, confirming bank must pay to the beneficiary. Reimbursing Bank

Reimbursing Bank shall mean the bank instructed and/or authorized to provide reimbursement pursuant to a reimbursement authorization issued by the issuing bank.


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