What is Trade Finance?

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Nitin Nimkar

What is Trade Finance?

What is trade finance, what are TF methods, and what is the role of banks in trade finance?

  Willie Odemwingie
Lecturer, Nigeria

Meaning of Trade Finance

Trade finance is a wide subject. It depends on the perspective from which one is looking at it.
Generally, whichever perspective and whoever is defining and talking about trade finance, it definitely will cluster around doing business at an international level, involving import and export, while dealing with certain issues.
Trade finance becomes more difficult and cumbersome during an economic down turn. The risks in trade finance can be managed through factoring or discounting of invoices by so called discount houses or factors.


What is Trade Finance.

Trade Finance means "finance for trade". For any trade transaction there should be a Seller and a Buyer. Various intermediaries such as banks and other financial institutions facilitate their trade transactions by financing their trade / transactions.
Banks play a critical role in international trade by providing trade finance products that reduce the risk of exporting. This business is highly concentrated in a few large banks.
Two principal trade finance instruments are Letters of Credit and Documentary Collections. They are preferred for larger transactions, which indicates the existence of substantial fixed costs in the provision and use of these instruments. Letters of credit are employed the most for exports to countries with intermediate degrees of contract enforcement. Compared to documentary collections, they are used for riskier destinations.
Check out this paper for more information. I hope it will be helpful.

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