What Is the Relationship between International Trade and Banking?

International trade and banking are related in many ways. Any type of trade, including international trade, depends on the bank for several services that are vital to the success of trade transactions. Some of these services include things like providing lines of credit, money transfers, drafts and other services. Without these banking services to help facilitate international trade, many trade transactions will not be able to take place.

An example of the relationship between international trade and banking is the drawing up of a draft between the importer and the exporter. Typically, the importer draws up a draft in which he or she requests either the importer or the importer’s bank to pay for the goods upon delivery or at some other specified date. The purpose of the draft is to establish the method and date of payment. The importer may choose to pay for the shipment ahead of delivery. In this case, the exporter usually requires the payment be made in the form of a funds transfer or in the form of a bank draft. The purpose of insisting on these forms of payment is to assure the exporter that any personal or business check drawn up by the importer will not bounce.

If the importer and exporter have had business dealings in the past, they might agree to an open account whereby the importer will only pay for the goods when they have been received. The payment will still be made through a bank using a check, through a transfer of funds or by a bank draft. Another relationship between international trade and banking is the issuance of a letter of credit to the exporter on behalf of the importer by the importer’s bank. The letter of credit is also a form of assuring the exporter that he or she will receive payments for any goods shipped to the importer. The bank takes on the responsibility for honoring any of the importer’s financial obligations regarding the trade transaction in line with stated terms.

Banks may also provide short-term or long-term loans to exporters to help them purchase goods they wish to export to trading partners or markets in other countries. Most short-term loans last anything from one year to five years, while the long-term loans naturally last longer. The exact length of time and other conditions for the loan depend on the agreement reached between the exporter and the bank.