Types of Trade Finance Instruments

Types of Trade Finance Instruments. EuroEximBank UK,explains.Take a look below.

The term trade finance means the financing of both international and domestic trade transactions. For the trade transactions to happen there needs to be both buyers and sellers of goods and services. In the past, these trades could have happened seamlessly without the need for guarantees that the buyer will pay and that the seller actually has the goods. Today, people are more skeptical. The buyer needs to make sure that the goods are actually available before they pay. The seller too needs to make sure they will not be ripped off and that the buyer will actually pay for the goods and services. Banks may help by being a go-between that shows proof that the services will be paid off and that the seller actually has the goods. This can be done by taking advantage of some trade instruments offered by the bank to verify transactions are actually real. Here are some of the Trade Finance instruments commonly used in Trade Finance.

Letter of credit
A letter of credit is typically a letter from the buyer’s bank assuring that the seller will receive payment for goods and services rendered to the buyer as long as certain documents and delivery conditions are met. In the instance that the buyer is unable to pay the seller, the seller can demand payment from the bank. If the seller’s demands meet the written in the letter of credit, it will honor the demand.

Bill of landing
A carrier to acknowledge that they are shipping certain cargo issues this document. It acts as an acknowledgment that the goods have been loaded. It also shows evidence that the terms of the contract have been honored and the goods are actually what the buyer agreed to buy from the seller. After the carrier issues this bill of landing to the seller, the seller takes it to his bank. His bank will then transfer it to the buyer’s bank and the bank will show it to the buyer. To receive the goods, the buyer will have to show this bill of landing to the carrier when the goods arrive.

Documentary condition
The documentary condition is a process whereby the seller tells his bank to forward the documents related to the export of goods to the buyer with a request for payment. The seller instructs the bank under which conditions these documents may be presented to the buyer. In most cases, the buyer may only receive documents such as the certificate of origin and the bill of landing after making payments. Documentary collections make the importation and exportation of goods cheaper but they may not have as much security as the letter of credit. With a documentary collection, while the bank acts as an intermediary, it does not give the assurance of payment. Once the buyer’s bank receives the documentary collection, it may debit the buyer’s account and make payments only if the buyer authorizes it.

Trade credit insurance
This is a risk management insurance policy usually offered by governmental export credit agencies and insurance companies to people and businesses that want to protect their accounts payables from risks such as bankruptcy and protracted default. To Know More Click Here

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