To make a more exact explanation of trade financing, we should research the sense of this definition and its principle of operation. It can be said that such phenomenon is a science that allows controlling the capital used for the worldwide market. This science provides a specific set of tools for financiers, so that they can conduct operations and study data on cash turnover, on loans, assets and other trading components. Trade finance also allows giving guarantees, for example, between both sides, which send goods from one place to another. The second side wants to get a guarantee of the transaction, so it asks to give him related documents to reduce the risks. The bank gives such documents to a person from the point of departure, but it is important to know that the bank only provides documents - it works only with documents, but not with the real goods (which was sent) or with services. In this case, trade finance is a set of verified and clean documents that give a guarantee for sending and receiving goods.

It can also be used when a person needs additional funding, it can be a different situation about a product or service. Any seller or buyer can get help with a lack of funding. But this procedure should be effective and not have risks for all parties. For this you need to take into account several important points:

  • Security of the supplied product or service.
  • Monitoring the entire process using transactions.
  • Necessary control of goods or services, debt repayment and control of the financing use.

But here there are several main factors that make such a science, as trade financing an important element of the international economy:

1. Reducing risks in making payments

One of the parties is always not sure whether she will receive payment, so everyone is always looking for an opportunity to rid themselves of risks. Trade finance uses its tools to reduce all risks to zero and make a deal calm.

2. Goods and services

In any scheme for the sale of goods enter other organizations, it can be a bank, credit company, delivery service, technical company and others. Trade finance provides a guarantee of security, it does not matter what the product it would be.

3. Calm for both sides

Trade financing is a process, and a bank that participates in a transaction becomes a guarantee between both parties. All this is done in order to meet the needs of both sides (companies).

4. Factoring

Trade finance has an important tool - factoring. So, the first company pays a certain amount (percentage) of the second company, before sending the goods. This is a kind of small guarantee. Then the second company receives the ordered product and the first party transfers the balance of the amounts minus the paid interest. A similar system is in real estate, when before buying a client gives a seller a deposit.

If you look at trade finance as an international scheme, many different organizations enter into this system. Experienced financiers consider this system to be very precise and well thought out because it makes it possible to avoid many conflicts during the deals. So, if we consider the trade finance in general, then we can say that it helps all the members of the transaction to resolve a conflict situation. Each of them wants to have guarantees, without risks, and bring the deal to the end with benefits for both sides (one of them gets money, the other - goods). This system is a third side that solves the issue with deliveries, removes the risks with payments and provides a loan if there is a shortage of the necessary financing to send the goods.

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