International trade allows countries to expand their markets and access goods and services that otherwise may not have available domestically. As a result of International trade, the market is more competitive. This ultimately results in more competitive pricing and brings a cheaper product home to the consumer. Trade finance represents the financial instruments and products that are used by companies to facilitate international trade and commerce. Trade finance makes it possible and easier for importers and exporters to transact business through trade.
How Global Trade Finance Works
The function of global trade finance is to introduce a third party to transactions to remove the payment risk and the supply risk. Trade finance provides the exporter with receivables and payments according to the agreement while the importer might be extended credit to fulfill the trade order.
The parties involved in trade finance are numerous and can include-:
Trade financing is different from conventional financing and credit issuance. General financing is used to manage solvency and liquidity, but trade financing may not necessarily indicate a buyer’s lack of funds or liquidity. Instead, trade finance may not be used to protect against international trade’s unique inherent risks, such as currency fluctuations, political instability, issues of non-payment, or the creditworthiness of one of the parties involved.
Below are a few financial instruments used in trade finance-:
Note- Although Global trade has been in existence for centuries, trade finance
facilities its advancement. The widespread use of trade finance has contributed to
international trade growth.