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Financing of Foreign Trade

There is no need for currency movement when a trade happens between nations. The banking system settles transactions instead, which involves balancing one liability against another. The banking system provides the export industry of goods with various payment methods and the importer with various payment options. The majority of international transactions’ payment components are split between two of these options.

Ways of Financing Foreign Trade

Some of the ways the financing of foreign trade are listed below

1. Bills of Exchange

To finance foreign trade, businesses must choose to switch to the documentary bills of the exchange settlement system. Once they have been trading with one another for some time and have developed a trusting relationship.

The use of open account transactions for financing foreign trade, telegraphic transfers, mail transfers, cheques, or draughts is an additional option to finance foreign trade.

2. Open Account Remittances

To this method, The exporter might agree to provide his goods on a bank-to-bank basis. It happens,  if the importer has a strong credit standing and reputation overall. The exporter would send the documents on the consignment directly to the importer after dispatching his goods and debiting his client’s account with their cost. 

In this financing of foreign trade, the importer would have sent a disbursement at predetermined intervals to settle the open account’s outstanding balance. Alternatively, the settlement happens at a predetermined time following the receipt of each shipment.

3. Transfers via Telegraph

A telegraphic transfer for financing foreign trade was used as a regular settlement on credit terms. This is a directive from the importer’s bank to the exporter’s bank to transfer a portion of the rebalancing on the importer’s profile to the export industry. 

The importer ends up paying the bank the amount in foreign currency, converted into local currency. This type of transfer’s main benefit is that it is a quick method of payment.

4. Mail Transmittal

This is similar to a telegraphic transfer for financing foreign trade. It comes except for taking more time to send advice via mail rather than telegraphing the correspondent bank.

5. Banker’s Draft

This is a check that one bank draws for another for financing foreign trade. An importer can purchase a banker’s draught in the exporter’s strategy for currency trading to pay for a consignment under foreign trade finance.

The exporter can negotiate the draught or can send it for gathering amount after receiving it by mail. Similar to a telegraphic or postal transfer, the importer’s bank is telling the correspondent bank to transfer some of its parity with that bank to the exporter.

6. Cheques

As an alternative, the importer may settle his account by writing a cheque from his bank account and mailing it to the exporter for foreign trade finance. But he needs to make sure not to break the nation’s exchange control laws in the process. After that, the exporter needs to deliver the check to his bank for processing or collection.

7. Bills of Exchange

For foreign trade finance, It is an unconditional written order from one person to the other.  An individual who gives it signs the individual, and requires the recipient to pay a specific amount of money to another person.

8. Documentary Bills

A bill of exchange is a kind of documentary bill that gets support from the documents proving ownership of the goods for doing foreign trade finance.

The exporter sends his records through this financial institution for delivery to the importer after the acceptance of a bill of exchange. Documents are released after the payments of dues. This method is considered quite lengthy.

Conclusion

Financing foreign trade is a list of methodologies. Importers or exporters use to clear the dues for the purchasing or selling of goods or a commodity. There are numerous ways in which financing of foreign trade happens. 

Financing of Foreign Trade – FAQs

What are the Guarantees that various bank needs to finance foreign trade?

Ans. There are now six different types of guarantees to meet the various needs of banks for financing foreign trade

  • Packing credit guarantee
  • Post-Shipment Export Credit Guarantee
  • Guarantee for Export Finance
  • Guarantee for Export Production Finance
  • Guarantee of Export Performances
  • Guarantee for Transfer.

What is the primary mission of ECGC for the financing of foreign trade?

Ans. The mission of ECGC for foreign trade financing is to provide as many different kinds of clients as possible. It offers high-quality, cost-effective service that meets their needs.

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