Trade Finance means financing for trade, described both as science and as an imprecise term. It concerns both domestic and international trade transactions that require a seller of goods and services as well as a buyer. Banks and other financial institutions act as intermediaries, and facilitates these transactions by financing the trade. To minimize the risk, these institutions can also assist your import and export activity, and help maximize your international and domestic trading potential while improving cash flow.
Although, International trade is a tricky business, different financial institution offer the following products and services in the trade finance branches.
Letter of Credit: Letter of Credit is an undertaking or a promise given by a Bank/Financial Institute on the behalf of the Importer to the Exporter. It assures that the payment will be made to the supplier after documents that comply with the letter of credit have been received.
Bank guarantee: It is an undertaking given by the bank on the behalf of the applicant to the beneficiary. In case, if the applicant failed to fulfill his/her obligation either financial or performance as per the agreement made between the applicant and beneficiary, then the guarantor bank makes payment of the guarantee amount by demand or claim from the beneficiary, on the behalf of the applicant.
Collection and Discounting of Bills: When an exporter/Seller sold goods and services to the Importer/Buyer, the Exporter’s bank on the behalf of exporter collects the payment from the importer’s bank as per the agreement made between the both. It is a major trade service offered by the banks.