The Various Trade Finance Products Offered by Financial Institutions Explained

Trade finance essentially helps buyers and sellers carry-out import and export transactions by assisting them financially. The financial instruments offered to people who need trading finance comes in various forms. Exporters and importers in both domestic and international transactions can benefit highly from such financial instruments as the financial institutions and banks that arrange the financial help offer both security and mitigation of risks for both buyers and sellers.

In this article, we explain some of the trade finance products provided by both banks and financial institutions. These products are provided to the buyers and sellers by way of an agreement signed by both parties and the banks.

Letters of Credit: These are used when the bank or financial institution gives an undertaking that it will pay the exporter or seller if they present them with documents related to the shipment. The bank acts on behalf of the buyer to ensure the seller will provide the complying documents to the bank designated by the buyer under the purchase agreement. The financing bank of the buyer will then make payment to the seller after accepting the documents from the seller or exporter.

Bank Guarantee: This is when an undertaking is made to the applicant by the bank in favour of the beneficiary. If the applicant fails to fulfill the obligations quoted in the agreement with the bank either financially or performance wise, the bank who has undertaken the guarantee will make the guaranteed payment to the beneficiary on behalf of the applicant. The payment will be made only when the beneficiary makes a demand or claim to the designated bank under the agreement by the applicant. There are several bank guarantee instruments available to those involved in trading, and they would include Tender Bond, Performance Bond, Advance Payment, Financial, Labour, and Retention.

Collection and Discounting of Bills: This is one of the most utilized trading services in trading circles offered by the bank, in which the seller’s bank collect payment from buyer’s bank. Under the agreement, the seller’s bank will collect the payment proceeds from the buyer’s bank on behalf of the seller for the goods sold to the buyer by the seller. To enact this, an agreement is drawn between the buyer and seller.

Trade finance products offer peace of mind to involved parties and allows them to trade smoothly. The perennial doubt in the minds of both parties is dispelled by the intervention of the financial institutions so the involved parties i.e. the buyer and seller can complete transactions with utmost trust and surety.

Private funding for such a venture is, therefore, a better option because they can waive several restrictions governing the loan agreement while offering import finance to those who have a bad credit history for example