Trade finance is a range of products offered within corporate banking to assist the smooth operation of international trade.
The biggest risk with international trade is time.
Either the exporter has to spend time and money to manufacture and ship products to another country while hoping that the overseas customer pays once the goods are delivered, which carries a lot of risk for the exporter.
Or alternatively, the exporter may demand payment upfront with the importer then having to wait for the finished goods to be manufactured and successfully shipped, which carries risk for the importer.
The trade finance suite of products aims to rebalance the risk between the importer and exporter.
A classic letter of credit may be requested by an exporter who would otherwise have to wait for payment once the goods have been received by the importer.
The arrangement is that the exporter requests the importer to ask their bank to provide a letter of credit.
This letter of credit acts as a guarantee stating that if the importer fails to pay for the goods once they are received, then the importer's bank, which issued the letter of credit, will step in and pay the exporter instead.
Essentially, the exporter is relying on the credit worthiness of the importer's bank to reduce the risk of non-payment.
This arrangement facilitates the trade, which might not have proceeded.
If the exporter had to rely solely on the importer's credit worthiness.
The importer's bank will charge a fee for the letter of credit.
There are a range of solutions in trade finance that are driven by the credit worthiness of the importer and exporter, as well as the timing of the cash payments between them and their banks.
These solutions also consider the roles of the parties involved if anything goes wrong, and they help facilitate international trade by leveraging the credit worthiness, regulated nature and global reach of banks.
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