What is Trade Finance? This concept basically revolves around products and services, which are used for ensuring two things. One, that the exporter is paid his dues and the other, that the importer gets the delivery. Distributive trade, one which involves a buyer and seller is usually the one which is involved with the concept of trade finance. One of the reasons for the introduction of trade finance could be the fact that, today’s world is a more connected one and with more connections comes a great amount of financial uncertainty. In such a volatile world, it always serves better to protect oneself against any kind of commercial or political risks.
Trade Finance at its essence, has been existed for thousands of years and it can very well be traced back to the times earlier days, of Silk route. It existed since long ago, from before the times that economic imperialism came into being and England set out to make its colonies. As surprising as it may be to believe, but it existed well before the stock markets came into being. Cut to the present times, where this is a tremendously thriving, multi billion dollar business. This may be a result of the fact that the world has begun to trade on a greater scale, everyday sees more and more commodities being bought and sold in the markets. This results into more and more banks and companies having to lend money, in order to keep the steady flow of the global supply chain.
So now that we know what trade finance is all about, let’s focus on how and why is it so important. Let’s take an example. Imagine yourself to be a coffee trader in today’s times and where else would you find the best in class coffee beans, but in Africa. But, you stay in India, so then how would be able to function as an International buyer? More importantly who will give you money, in order to purchase from the natives in Africa? How will you be able to finance all of your transactions, in another currency in addition to being able to successfully pay all those native traders? The answer to all of these above questions would be a trade finance department. This department of a financing firm would deal with all your financial transactions and thus would ensure the development of your business.
Any good or service at the very basic level, have their own underlying value and a bank is very well able to offer a loan against the collateral value of the good. The bank would be comfortable with offering you financial help, as long as the structure of the deal would be helpful and advantageous to the bank. As a whole, the business of trade finance is not very complicated, but on the other hand the structures which form an essential part of trade finance usually tend to be a bit more complex.