The efficient management of cash, assets, credit, and financial instruments to conduct international trade is trade finance. Trade finance is the process by which working capital is provided to ensure smooth movement of trade. There are a number of financial instruments utilized in trade finance like letters of credit or L/C, bill of exchange, guarantees, trade credit insurance, and documentary collection.
Why Use A Letter Of Credit?
In a letter of credit, the bank acts as a mediator between the importer and exporter. The letter of credit is issued by the bank to the exporter guaranteeing to pay the money when he meets the criteria laid out in the letter of credit. The duration of the letter of credit is for the length of the transaction and ends when the money is paid to the exporter or the seller. The L/C does not protect the beneficiary from the loss that he may have to endure if the deal does not go through. The letter of credit can be used not only in the selling of goods but also of services. The buyer sends the letter of credit from his bank to the exporter's bank thereby making the buyer's bank responsible for timely payment of his money.
Common Financial Instruments
Bank guarantee is also another financial instrument in which the bank guarantees to pay the beneficiary in the event the buyer defaults on the payment. The difference from a letter of credit is that the bank guarantee comes into play only when the buyer defaults. Another financial instrument used commonly is documentary collection wherein the seller forwards the sale documents to the buyer's bank with conditions attached as to when it can be released for collection of goods from the shipper. A bill of exchange acts like a cheque or demand draft and is a promise to pay the said sum of money at a prearranged date to the person or company mentioned in the bill of exchange. Trade credit insurance guarantees protection from defaulting buyers and an unstable political situation.
The Need For Financial Services
The financial services provided by the different financial agencies are many. The various sectors under the financial industry are mainly the banks, the insurance companies, private bankers, credit card companies, investment funds, brokerage firms, wealth management services, hedge fund management, mortgage services, the list is limitless. These financial services are needed to help you to manage your funds wisely. All of us work hard to make sufficient money to meet our needs and to save for our old age. Financial services help you to invest this money wisely and according to the rules of the land, so that they are available to you when needed. It helps you to actually sit down and study your financial picture and make realistic plans for the future.