Mechanics of International Trade Finance Essay

We will be discussing the topic of “mechanics of international trade finance” in this sample essay. As we know, trade has been around since time immemorial, be it maritime or land routes. Adding to this, as the times advanced trade has only gotten more intense. Therefore trade finance is a huge part of it as for trading something one needs capital. We shall be discussing the work in detail.

Nevertheless, the topic of international trade finance is quite important to understand for students. In order to help students grasp the concept well; we shall be looking at different topics related to the concepts. Moreover, we shall be discussing the following topics: we shall start the discussion by going through the definition of trade finance. After this we shall be exploring the working of the trade finance includes who provides it and who needs it. Nevertheless, we shall go through types of trade finance and finally ending the discussion by mentioning the benefits of trade finance.

What is trade finance?

The term “trade finance” refers to the various instruments or products in finance that are used by various companies in order to finance commerce and trade at the international level. Moreover, trade finance provides importers and exporters with the ability to engage in business through trade with ease. Adding to that, trade finance covers a variety of financial products used by banks and other organizations to make trade and commerce accusable to all.

Moving on, in the next section of the paragraph we shall be discussing the importance or need of trade finance.

Why is trade finance needed?

As we know the main goal of almost all the business is to sell as many services or products as possible. This because the number of products sold directly increases the profit. Moreover, the business wants to acquire the service or products they sell at the cheapest cost possible.

However, when a business buys from another business i.e. B2B: the amount isn’t paid for the goods or services until the end of the cycle. Adding to this, on the international level of trade, the payment cycle is even more troublesome than a domestic one. Consequently, this has a huge impact on the cash flow of the business.

This is where trade finance comes in. What it does is that it pays international purchase upfront, while in the case of importing it pays the supplier so that products can be dispatched. As a result, it helps decrease the severity of the impact on the cash flow of business. Also allowing them to participate in trade without waiting or being hampered by a delay in payment.

Working of international trade finance

The way trade finance functions are that it adds a third-party to transactions in order to remove the risk related to payment and supply. Moreover, exporters can avail receivable and payments based on the agreements through trade finance while on the other hand importers may use it to increase the credit fulfilling the trade order.

As we discussed previously international trade has existed for many centuries, nevertheless it has been through technological and another advancement too. As a result, trade finance has been seen being used in larger numbers which in turn has contributed to the growth of international trade.

Nevertheless, trade finance should not be confused with traditional financing. While conventional financing concerns with solvency and liquidity, on the other hand, trade finance does not concern with the client’s liquidity or lack of capital. Rather trade finance can be used against unique risks related to international trade which includes currency fluctuations, political instability, issues of non-payment, or the creditworthiness of one of the parties involved.

Moving on we shall be looking at who provides the services of trade finance and who usually avail it. these are as mentioned below:

Provider of trade finance

• Syndicate
• Trade finance houses
• Buyers
• Banks and other financial organization
• Suppliers

The receiver of trade finance

• Traders
• Manufacturers
• Importers
• Exporters
• producers

Types of Trade finance

As we discussed above trade finance is different from its counterpart i.e. the conventional finance. As a result, the financial products trade finance differs as well. These areas mentioned below:

• Term Loans
• Working Capital Limits like Overdraft and Cash Credit
• Invoice Discounting or Invoice Factoring
• Export Credit is also known as Packing Credit
• Insurance

Types of Trade finance products

As we discussed above there are different types of financial products in trade finance. These can be divided into two categories which are as mentioned below:

Letter of Credit

Letter of credit as suggested by name refers to the promise given to the importer by the bank on side of the importer. Bank says that as soon as the documentation is presented by the importer regarding the purchase agreement, the bank will pay the exporter.

Bank Guarantee

In this form of trade finance product, the bank works as guarantor in case the importer or exports may not be able to fulfill the terms and conditions of the agreed contract.

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