What is Trade Finance: All You Need To Know

Many people know about the term ‘trade’ but when it is combined with ‘finance’ to form the phrase ‘trade finance,’ many people seem to get lost.

What is trade finance? It is not easy to define what exactly ‘trade finance’ is. Simply put, trade finance is the business of financing trade or business. Others define it as the act of financing for trade that concerns both domestic and international transactions.

Other financial experts define it simply as the trade in which a financial institution steps in to help one finance a trade that is either domestic or international.

Trade finance includes the following:

Letter of credit

A letter of credit is often for those traders intending to import or export goods to or from another country. An exporter may require the importer to prepay for goods shipped, the importer may wish to reduce risk by requiring the exporter to document the goods that have been shipped.

Banks may assist by providing various forms of support. For example, the importer’s bank may provide a letter of credit to the exporter (or the exporter’s bank) providing for payment upon presentation of certain documents.

A Letter of credit is a promise given by a Bank on behalf of the Importer to the Exporter, that, if the Exporter presents the complying documents to the Buyer’s designated Bank as specified by the Importer in the Purchase Agreement then the Buyer’s Bank/Financial Institute will make payment to the Exporter.

In simple terms, an exporter may require the importer to pay for the goods intended to be imported before they are imported. What if the importer pays and the exporter refuses to send the goods? This is where the letter of credit comes in.

Local purchase order

LPO financing allows clients who have obtained purchase orders or letters of award to deliver goods and services or to carry out contractual works. Banks facilitate the supplier to enable them to meet a supply order from a known and acceptable buyer.

Guarantee

A bank guarantee is a ‘promise’ to underwrite or make payment to a third party, on certain terms. Often a third party will request a guarantee of payment upon dispatching its goods or services to another party, and a bank can guarantee this payment through a contractual obligation.

Invoice discounting

This is when a bank lends a business an amount of money equal to that of its unpaid debtors as collateral for a loan. Invoice discounting essentially accelerates cash flow from customers, so that instead of waiting for customers to pay within their normal credit terms, you receive cash almost as soon as you issue the invoice.

Rafiki Microfinance Bank is among the financial institutions that offer trade financing activities to traders.

What does Rafiki Microfinance have to offer to customers as far as trade finance is concerned? Watch out for more details.