What is trade finance? Trade Finance is essentially offered to any trader who is involved in business transactions. The term Trade Finance covers the various financial instruments offered to traders to help them carry out business exchanges without getting themselves into hardship. Financial organisations and Banks offer several trade finance products in order to facilitate this.
Trade finance can either be applied to a local business or an international trading business. All the arrangement requires is the participation of a buyer and a seller, and the financial part of it is concluded by the financial institutions. The forms with which the financial transaction takes place include loans, credit against billing and letters of credit. Other trade financing instruments include documentary collection, credit insurance, factoring and forfeiting, and any of these can be chosen by business owners in order to conclude their business.
A bank guarantee is a guarantee that is extended by the financial institutions to guarantee payment to the beneficiary, or as we know them the seller, on behalf of the applicant or buyer. If the buyer then fails in his promise of paying for the goods he has received from the seller, then the bank will step in and make the payment if the seller so demands it in writing. Bank guarantees can be offered in the form of a tender bond, advance payment, performance bond, or retention. A Letter of Credit is another form of bank guarantee that is the most used nowadays and entails the bank giving a letter of credit to the buyer under an agreement. If the seller presents the letter of credit to a financial institution they will make the relevant payment to the exporter or seller.
Another bank guarantee option is the collection of and discounting of bills and this is when the financial institutions collect payment from sellers and buyers banks as provisioned in the agreement. A prior arrangement will be executed between the buyers, sellers and their respective banks to conclude the financial deal. A trader can also use other traditional trade finance products offered by banks and financial institutions, and each of them have different sets of terms and conditions required to transact the deal. Private financiers are better equipped to offer trade finances as they are not answerable to anyone else and can, therefore, calculate a trade finance deal that is more flexible for the borrowers.