To reduce the risks related to international trade
transactions, global trade flows are supported by the trade finance. To help
importers and exporters in trade transactions, trade finance constitutes of
instruments and products, which companies use for international trade and
commerce. It has been reviewing the global trade and export finance market
since 1983.
Trade finance brings down the payment risks of importers and
exporters by introducing a third-party to business transactions. The exporters
get receivables or payments, as per the agreement; on the other hand, importers
receive credits to fulfill the trade order. Trade finance is mostly availed to
ensure protection against the unique inherent international trade risks – like
currency fluctuation, political instability, non-payment issues,
credit-worthiness of any party involved in the trade and others.
Key documents required in trade finance are:
•
Bill of exchange
•
Promissory note
•
Packing list
•
Airway bill
•
Commercial invoice
Institutions of trade
finance are:
•
EXIM Bank
•
ECGC – Export Credit
Guarantee Corporation of India
•
Development Banks such as
IDBI, ICICI
•
National Small Industries
Corporation
•
Commercial Banks
•
State Finance Corporations
The major parties involved in trade finance include banks,
companies, exporters, importers, insurers, credit agencies and service
providers.
However, the two
major players are:
●
Exporters: Receiving
funds to finance their consignment
●
Importers: Ensuring payments
for the quality and quantity of the goods
Import finance
Import finance bridges the gap between receiving the goods
and transferring of the payment. It is usually referred to as a short-term
finance provided by a third party for the import of goods into an overseas
country. With the subsequent increase in international trade, whenever a
business faces difficulty in trading overseas alone, import finance becomes the
key mode of financing. It has also encouraged several traders to take up to
international trade and globalize their businesses.
Major requirements in import finance are:
•
Beneficiary’s audited
financial statement
•
Complete business plan
•
Expected financial cash-flow
•
Credit reports
•
Company’s directors’ details
•
Company’s liabilities’ detail
Import finance can be of several types including
usance/standby letter of credit, bank guarantees, invoice finance, asset-backed
facilities and others. Documents required to secure import finance are
invoices, bills of exchange, promissory note, bill of lading, letter of credit
and other specific ones.
Export finance is the financial help required by an export
business for purchasing, processing, manufacturing, packing and exporting of
goods to overseas countries. It is generally the credit facilities or
techniques of payments at the pre-shipment and post-shipment stages.
Export finance is exclusively provided by commercial banks,
which are members of the Foreign Exchange Dealers Association. In India, the
refinance facilities to the commercial banks in India are issued by the Reserve
Bank of India (RBI) and the Industrial Development Bank of India (IDBI).
Depending on the type of trade, export finance can be
provided to the exporters as short term, medium term or long-term finance. In the out turn of globalization
and the subsequent increase of competition and efficiency, varied types of
trade finance companies and trade finance institutions have emerged depending
on the business needs and the nature of export transaction.
Export finance is majorly categorized into pre-shipment
finance and post-shipment finance. Pre-shipment finance is the finance required
to help exporters with working capital finance to fund wages, production cost,
raw materials, processing and converting into finished goods and packaging,
after buyers confirms the order – mostly through Letter of Credit.
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