Master Trade Finance: A Simple Guide to Achieve Great Success

Introduction: Welcome to our comprehensive guide on trade finance essentials! Whether you’re new to the world of international trade or looking to deepen your understanding, this beginner’s guide will cover everything you need to know about the basics of trade finance. From letters of credit to export/import financing. We’ll break down the key concepts and terminology to help you navigate the exciting world of global trade.

Imagine you’re a shop owner in your town. And suddenly you get a brilliant idea to sell your unique handmade products to people in other countries. But here’s the tricky part: how do you actually make that happen? That’s where international trade finance comes in!

International trade finance is like your magic wand for making deals with people from all over the world. It’s all about the money stuff and the tools you need to buy and sell things across borders. Let’s break it down in simple terms:

Let’s begin from the beginning.

What is International Trade Finance?

1. It’s nothing but providing goods or services across the border. International trade finance refers to the financial services and instruments. It facilitates trade transactions between buyers and sellers located in different countries.
2. We call the process of financing such trade at the international level international trade finance. We call the same thing happening inside the border of the country domestic/inland trade finance.

Roles/ Players in International Trade

In the thrilling world of international trade. There’s a cast of characters who work together to make sure goods flow smoothly across borders. Let’s meet the players and learn about their roles in this exciting adventure!

Now what are the roles or players associated with this export-import business?

1. Exporters: Exporters or sellers of the goods.
2. Importers: Importers or buyers of the goods.
3. Banks: Banks basically act as intermediaries between the exporter and the importer. Sometimes just as agents and sometimes taking up much more responsibility than mere agents, as will talk about this later.
4. Customs Authorities: Think of them as the gatekeepers of international trade. They’re the ones who check all the paperwork and inspect the goods to make sure everything is shipshape before they enter or leave a country. They keep an eye out for any contraband or treasure that shouldn’t be crossing borders.
5. Transport Companies: Transport companies are involved in the actual movement of the goods. If it is international movement then it is generally the shipping companies and Airlines. If it is inland movement its mainly by lorry trucks or rail.
6. Insurance Companies: The journey made by the goods is a long one in international trade. And even in inland trade during the journey from the seller to the buyer many unforeseen circumstances may come. Now insurance companies insure the goods so that the risk of financial loss due to damaged goods can be avoided.
7. Regulatory Bodies: Now there are many regulatory bodies in international trade. But mainly there are the World Trade Organization or WTO and the International Chamber of Commerce or ICC. Now WTO is basically an inter-governmental organization that regulates the trade between various countries. And ICC’s main role is setting up the rules in international trade. Now the rules are voluntary, mind it. Although they are voluntary, almost all kinds of international trade observe them.
8. Certification companies: Now, when the importer buys goods without actually seeing them, he may ask for various kinds of certificates from the exporter. For example, if he is buying some kind of food item then he may ask for a health certificate. If he is buying something whose chemical composition is important to him then he may ask for a test report from an independent laboratory. So various kind of certificates like these are there. One certificate worth mentioning is the certificate of origin which is usually provided by the chamber of commerce which certifies the country of origin of the goods.

Movements

Now in trade finance, there are basically three kinds of movements happening. What are they?

1. Movements of the goods from the Exporter to the Importer: In the electrifying world of international trade finance, goods take center stage in a thrilling dance across borders. We have the Exporter and the Importer and the first kind of movement is basically the movements of the goods happening from the Exporter to the Importer.

• Movements of the Documents from the Exporter to the Importer: In international trade finance, the documentation shuffle is crucial to keeping the rhythm of the trade. From invoices to bills of lading, these documents ensure that goods flow smoothly from one country to another without any missteps. Think of them as the choreography that guides the movement of goods across borders, ensuring that everyone stays in sync. It’s happening from the exporter to the importer and keep in mind that these documents are very important. Because without these documents the importer will not be able to release the goods in his own country.

• Movements of the Payments from the Importer to the Exporter: And last but not the least the payment made by the importer to the Exporter. Imagine a delicate dance where payment moves seamlessly from buyer to seller. This is the payment pirouette of international trade finance. One of the most popular moves in this dance is the letter of credit, where a bank guarantees payment to the seller once the goods are delivered. It’s like a magical spell that ensures everyone gets their fair share of the treasure.

Now depending on the timing of these three movements we basically have five different kinds of payment methods in international trade. Let’s see what they are.

Methods of Payment in Trade

1. Advance Payment: The Advance Payment name itself suggests what it is, we have the buyer and the seller and the buyer is first making the payment to the seller, and only after the seller gets the payment does he send the goods to the buyer, now here the main parties involved are the buyer and seller or the importer and the exporter, no banks are getting involved directly so there is no risk mitigation by the banks and the importer is at very high risk because he is parting with the payment without getting goods, then why will anyone do this? This usually happens when the importer is new and small in business size compared to the exporter and he has no other way, but to trust the exporter.

• Open Account/Cash On Delivery: Open Account or Cash On Delivery, it is just the opposite of Advance Payment. We have the Importer and the Exporter, and the Exporter first sends the goods and only after getting the goods does the Importer send the payment. And again there is no risk mitigation by banks and just the opposite the Exporter is at high risk and again usually this happens when the Exporter is new or small and business size compared to the importer.

• Overviews of Collections and Letter of Credits: Let’s have an overview of Collections and Letter of Credits, what are they? Now in both the cases the

Now this is just an overview, short overview of Collections and Letter Of Credit, we will be talking in detail about both of these in in our later blogs, so don’t worry.

ICC Publications for Trade Finance

We have already told that ICC publishes various kind of Trade Finance rules, now you should know which is for which kind of payment method. Let’s see

1. For LC: We have uniform customs and practice of documentary credits (version 600), also known as UCP or UCPDC 600.
2. Further explanation of LC documents: To support this we have something called ISBP 745 (international standard banking practice)
3. For collections: For collections we have uniform rules for collections 522 or URC 522
4. International Commercial Terms: For the movements of the goods we have International Commercial Terms Incoterms 2010 (A new version came up Incoterms 2020)     
5. For Bank-to-bank reimbursements: For Bank-to-bank reimbursements we have Uniform Rules for Bank-to-Bank Reimbursements (URR 725) approved on 15-16.04.2008 and in force since 01/10/2008
6. For Demand Guarantee: The ICC Uniform Rules for Demand Guarantees (URDG) reflect international standard practice in the use of demand guarantees and balance the legitimate interests of all parties. The current edition, URDG 758, was officially endorsed by the UN Commission on International Trade Law (UNCITRAL) in July 2011.

Now we will talk in details on some of these in later blogs, and gradually we will go in depth of Trade Finance, so anyone who is new in Trade finance or interested to know about this stay tuned with our further blogs on Trade finance in depth.