Trade Finance includes financial services and instruments that enable and facilitate trade internationally. Trade finance is ideal for importers and exporters to carry on smooth international transactions by reducing risk in global trade. Trade finance can help reduce the risk associated with global trade by reconciling the divergent needs of an exporter and importer.
Unlike conventional finance, trade finance is used to protect the two parties from the various risks involved in international trade and does not mean that the parties lack funds or liquidity. The risks involved in international trade are currency fluctuations, non-payment by the party, political instability, creditworthiness of the parties, etc.
Trade finance involves a third party for conducting a transaction thus eliminating the risk of supply and payment. In trade finance, the exporter is provided with the payment as per the agreement and the importer can avail of a credit facility to fulfill the trade order.
Apart from protecting against the risks, non-payment, and non-receipt of goods, trade finance also improves the efficiency and revenue. It enables the company to receive a cash payment based on the accounts receivables as the buyer’s bank guarantees payment. This also ensures timely payments and assured shipment of goods. The different parties involved in trade finance are importer, exporter, banks, insurers, credit agencies, trade finance companies.
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