Global trade finance represents a wide variety of financial instruments used by banks or financial institutions to fund the gap between importing & exporting goods. In simple words, global trade finance services make it easier for international traders to facilitate trade transactions without facing associated overseas risks including non-payment & non-performance. It allows corporates & SMEs to access a broad range of global trade finance instruments to access short-term working capital.
Types of Global Trade Finance
Here are various types of global trade finance that both importers & exporters can choose to reduce risks after getting agreed on certain terms & conditions.
1. Letter of Credit - Also known as “Payment Guarantee Letter” or “Documentary Credit Letters”, LCs are legal documents provided by a bank or financial institution guaranteeing that the exporters will be paid on time for the shipped goods. In the event, if the importers default, the issuing bank will reimburse payment on behalf of its applicant ie. importers.
2. Bank Guarantee - Bank Guarantee is also a legal guarantee provided by banks or FIs to the exporters regarding on-time payment on behalf of the importers but only if the importer defaults. They are widely used in real estate contracts and infrastructure projects.
3. Standby Letters of Credit - Standby LC is a secondary payment method where the bank guarantees an on-time payment guarantee to the exporters in case the importer defaults. But the exporters can claim the money only when they fulfill the requirements of SBLC and submit the proof of the buyer’s default to the concerned bank.
4. Documentary Collection - Documentary Collection is another type of global trade finance where the exporters instruct their bank to forward shipping documents to the importers’ bank with a request to present those documents to the importers to release payment.
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