The various trade finance products provided by financial institutions

What is trade finance? In simple words, trade that is financed by banks and financial institutions is called trade finance. Why do banks need to finance the trade when traders can pay from their own sources? Because the traders involved in a trade namely the buyer/importer and seller/exporter do not trust each other to execute their part truthfully hence the requirement of a third party like a bank intervenes to smooth things over. Several kinds of trade financing products are sold on the market, and banks and other institutions of reputation offer these services to the traders for a fee which is customised to the client’s needs. The primary trade financing tools include the following:

Letters of credit: This is a promise or undertaking provided by a financial institution or bank on behalf of the importer/buyer to the exporter/seller. Under this promise the buyer’s designated bank or financial institute will make the payment to the exporter on presentation of the relevant documents of the particular trade. The designated bank by the buyer will be mentioned in the purchase agreement while executing the deal.

Bank Guarantee: a guarantee given to the beneficiary by the undertaking or promise of the applicant’s bank is known as a bank guarantee. In the agreement, the bank will pay the beneficiary the applicant has promised to pay by performance or finance in case the applicant fails to fulfill the promises agreed in the agreement. The bank will pay the agreed amount on the submission of claim or demand by the beneficiary.  There are several types of bank guarantees given by the banks, and these include Tender Bond, Performance Bond, advance payment, retention, financial and labour.

Collection and discounting of Bills: These are one of the primary services provided by the banks to its trading clients and under these agreements the seller’s bank will collect the payment on behalf of the seller’s designated bank against the shipment of goods sold to the buyer by the seller.

There are several traditional trade finance products that the banks sell to their clients and having an account with a bank which provides these services will hugely benefit the traders engaged in importing and exporting of goods locally and internationally. It should be noted that without the guarantee of the financial institutions it is not possible for traders to exchange trades smoothly. Private financial institutions are better options as they are fast in opening accounts and providing the required services to the traders. Private Banks and financial institutions also do not ask many questions when opening accounts.