What Is Trade Finance and How Does It Helps Importers?
Trading is a lucrative business vehicle on which several business success stories have been made. Only trading that is conducted with the utmost honesty and punctuality is likely to reward the parties involved. But what is trade finance anyway? For those people who do not know what trade finance is, it is a business transaction between two parties, a buyer, and a seller, involving goods. These transactions are usually financed or guaranteed by a bank or financial institution and the bank, or financial institution takes responsibility when a transaction fails to materialize as agreed with the buyer or applicant.
Trust is the most important element in the realm of trading, and the feeling of trust has to be mutual between a buyer and a seller. A buyer may think that the seller will not send all the goods requisitioned by them, and so may be hesitant to advance the payment to the value of the goods ordered. Similarly, an exporter may think that the buyer will not fulfill the commitment of making payment on receipt of goods. This mutual mistrust, unfortunately, can lead to trading transactions failing to be agreed, but the issues have been considerably mitigated by the involvement of a third party in the form of a bank or financial institution working on behalf of the buyer as well as the seller.
Import finance comes into play when an importer wishes to import goods from outside the country and for this he will need to requisition an exporter to ship the goods for him under a trading agreement. A third party such as a financial institution will usually get involved when there is no mutual trust between the buyer and seller. The buyer’s bank agrees to pay the seller in the case of the buyer failing to comply after receiving the goods. An agreement is made between the buyer and the buyer’s bank and various trading instruments like letters of credit, bank guarantee, discounting of bills, etc. are extended by the bank on behalf of the buyer. By producing a letter of credit, the bank guarantees the seller will be able to receive the agreed payment from the buyer’s bank.
The guaranteeing bank of the buyer will recover the amount that it paid to the seller as per terms and conditions agreed upon in the agreement drawn up between the buyer and the bank. This is a great arrangement because the payment of imported goods is guaranteed to the seller so the seller will ship the requisitioned goods to the buyer without any hesitation.