What Is the Relationship between Trade Finance and Banking?

Trade finance and banking are related in terms of international trade. Trade finance involves the provision of financial guarantee to the parties involved in the import and export of goods in order to facilitate the transaction. An exporter of goods requires some sort of guarantee from the importer that he or she will receive payment for the goods. This guarantee may be in the form of a letter of credit from the bank of the importer that is contingent on certain formalities, such as the presentation of the bill of lading for the goods from the exporter.

As such, trade finance and banking are related in the sense that they provide peace of mind to both the importer and exporter, enabling them to proceed with the transaction. The exporter is assured that he or she will receive money, and the importer is sure that he or she will receive the goods. Trade finance and banking are also interconnected in several other ways. Banking services come into play at the initial stage of the import and export deal by furnishing either the importer or exporter with short-term loans to help them facilitate the transaction. These short-term loans typically last anywhere from one to five years, depending on the agreement between the contractors and the bank. The loans enable the contractors to fulfill their obligations and to conduct the business.

Another type of service that connects trade finance and banking is the provision of long term loans. These loans of course last longer than short term loans and are provided for goods that require a lot of capital. For instance, a long term loan can be issued to importers and exporters of heavy, expensive machinery and equipment. The banks also work out the conditions and terms of this type of loan with the importers and exporters.

Apart from the importer and exporter, other parties are involved in trade finance and banking. The importer has to deal with his or her customers in terms of selling the imported goods in exchange for money. The importer’s bank plays an important role because it will process checks and other forms of payment from the buyers and perform other financial services like money transfers on behalf of the importer. he exporter’s bank performs similar services on his or her behalf because the exporter may need to transfer money from his or her bank in order to pay suppliers for the goods.