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How Does Trade Finance Work?

Trade Finance Letter of Credit represents the financial products and instruments used by the companies to initiate international trade and transactions. This trade finance credit facility helps ease down the transaction between importers and exporters through trades.

It covers the financial products that companies and banks utilize to make international trade transactions possible.

What are the key takeaways?

Trade finance has the following key takeaways, which are as follows;

  • Trade finance letter of credit makes the international transaction easier and also ease down the trading between international importers and exporters

  • Trade finance can also help minimize the risk of global trading by integrating the deviating needs of the importer and exporter.

How Does the Trade Finance Work?

The prime function of a Trade Finance Credit Facility is to introduce the third party to the international transactions, which removes the risk of supply of goods and payment risk. The trade finance helps the exporter get the goods and payments based on the agreement between the importer, exporter, and bank. This, in turn, helps to fulfill the trading needs. 

The main parties that are involved in international trade finance are as follows-

The trade financing letter of credit is different than that of credit issuance and conventional financing. In general, finance trading is used for managing liquidity and solvency. However, the trade financing is not necessarily indicating the purchaser may lack funds and fluidity.

Trade finance can be used to protect international trades and minimize the inherent business risks such as political instability, currency fluctuations, issues of non-payment, and the creditworthiness of the parties involved in the businesses.

How Does It Reduce the Risk of Trading?

Trade finance is helpful to minimize the risks that are associated with global trading. Ideally, trade financing helps the exporter and importer to pay upfront, which the importer and exporters require for the shipment of goods.

It acts as a medium between the importer and exporter to make payments and take the shipment but doesn't pay for the goods. But if the importer initiates the upfront payment, but the exporter accepts the payment by denying to supply the goods, the trade finance plays its crucial role.

Trade financing letter of credit acts as a guarantor and provides the bank proof that the exporter shipped the goods, and according to the agreement, they have to ship the goods when they get proof of the payment releasing. 

Bottom Line

With a trade finance letter of credit, the buyer's bank will take the responsibility of paying the sellers. This ensures that the payments and trading go smoother.

For more information visit our website: https://www.merchanttradecorp.com/

Merchant Trade Guarantee Corporation Company Limited (MTG)

Phone: +66 651209539

Email: info@merchanttradecorp.com

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Location: Bangkok, Thailand

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