Exim Bank Euro Trade Finance Project
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is an innovative global financial institution, specializing in trade finance solutions.
A business will certainly have times when it has to face financial difficulties, that is when the form of commercial financingcomes into play. So what is trade finance? How many types of trade finance are there? What role do they play? All of the above questions will be answered by Community Knowledge in the article about trade finance below!
1. What is trade finance?
Commercial financing can be understood in many different ways, but in a nutshell it is another way of calling commercial lending.
Trade finance is a form of intermediary between buyers and sellers to support financial lending in business (TheBank, 2019).
Action: Make it possible for importers and exporters to trade quickly through trade.
Commercial financing in banks is an activity implemented at the bank with a number of services such as: card opening, account opening, credit mortgage lending, etc.
Action: Helping to stabilize the financial situation in the country, reassuring the international commercial banking system and supporting business enterprises to expand production scale
5 subjects related to trade finance
There are many parties involved in trade finance activities, but here are 5 main objects with a big impact such as:
Suppliers
Bank
Insurance Company
Trade Sponsor
Consumers
2. Summary of 6 types of trade finance
Trade finance activities take place in many forms, each with its own manifestations and characteristics. In the following, Community Knowledge will detail the characteristics of 6 types of trade finance.
2.1. International trade finance
International Trade Sponsorship is a non-nationality-based trade sponsorship between Residents and Non-Residents or between Residents.
Capital flow direction: Capital flows from international trade finance are operated in two directions, one side from suppliers and the other side from recipients.
Capital flow constituents: Capital flows in international trade finance are constituted from 2 sources:
Financing capital flows from private organizations, mainly from commercial banks, are allocated to businesses in need of loans, through the credit market according to the principle of lending and repayment with compensation with interest.
Capital flows from government organizations and financial institutions in the international form are directly allocated to recipients as designated by the State.
Example: The Government promulgates trade finance for Vietnamese enterprises in 2020. Funding beneficiaries are divided into:
Beneficiaries of direct funding policies
Indirect funding policy.
International Trade Finance
2.2. Domestic trade financing
Domestic trade financing is an activity to support organizations and businesses within the national territory to carry out trade transactions more conveniently.
For example, Eximbank provides domestic trade financing packages such as notification, issuance and payment of domestic letters of credit to meet the domestic business needs of customers.
2.3. Export/import trade finance
Export/import trade financing is an activity that takes place between enterprises in a country that wants to go through procedures to carry out trade transactions with organizations outside the borders of the territory where they register their business.
Example: BIDV Bank launched a business support package in the form of import and export trade financing. The financing policies put in place are international payment services, export financing, import financing and a number of other services.
2.4. Receipt guarantee (Write in depth in this section)
Shipping Guarantee is a form of guarantee that helps create conditions for customers to pick up goods before receiving a set of shipping documents thanks to a guarantee from the bank.
Benefit:
Allow businesses to own goods without shipping documents
Avoid unnecessary delays that can lead to missed business opportunities
Supporting businesses to optimally save part of storage costs
Examples of types: The Joint Stock Commercial Bank for Foreign Trade of Vietnam directly underwrites the receipt of goods after fully verifying valid paperwork for Xuan Son Shipbuilding Company No. I, so that the company can easily receive the goods as desired.
Guarantee of receipt of goods
2.5. Export/import financing loans
Export/import financing loans are a product from banks to meet the needs of immediate payment to sellers, contributing to improving the reputation as well as position in trade negotiations of enterprises.
Example scenario: VPBank supports trade financing procedures, lends a loan to support import and export activities for Vietnamese small and medium-sized enterprises. Businesses that access this product package from banks will have the opportunity to get financial loans so that trade, export/import activities take place faster and more conveniently.
2.6. Collection of import and export documents
Collecting export/import documents on behalf of importers is a form of re-authorizing commercial banks to receive, inspect and notify documents sent by exporters on behalf of enterprises.
For example: MB Bank's service to support the collection of import and export documents facilitates while recording, inspecting and completing procedures from partner units. Supported businesses only need to check the final step to confirm that the desired results have been achieved.
3. List of 2 forms of trade finance
Businesses need to access trade finance services in banks in two forms: direct and indirect.
Forms of commercial financing
3.1. Direct trade finance
Direct trade finance is a measure to support direct capital through short-term, medium-term or long-term loans, in order to positively impact the trading activities of enterprises.
Example: Thanks to international forms of payment credit such as collections, guarantees, factoring, and documentary credit, businesses are supported in the import and export of goods, raw materials, machinery, equipment and production lines.
3.2. Indirect trade finance
Indirect trade finance is banks that support businesses to create a favorable business environment for trade activities.
Example: Within its scope, banks can adjust a number of beneficial environmental factors such as exchange rates, import and export tax policies, interest rate policies, legal environment, etc. to support business activities of enterprises.
4. The role of trade finance
Trade finance is a widely used tool to contribute to the growth of international trade in general and Vietnam in particular. Specifically, the following will be the roles for related subjects.
The role of trade finance
4.1. For enterprises
Minimizing risks in business: Thanks to being guaranteed by the prestige of banks, the project is also censored by banks, helping businesses avoid risk traps in trade.
Reduce the risk of financial hardship: Options such as penetrating credit facilities to guarantee the payment of receivables not only help companies transact internationally but also help them in times of financial difficulty.
Increase revenue and income: Through trade, exchange and trading activities will increase, which promotes an increase in revenue
Improve cash flow and operational efficiency: Businesses can access safe financial resources, facilitate business as well as expand corporate credit.
4.2. For donors
Sponsors can be private banks, commercial banks that provide financial support packages for businesses. Participating in trade finance activities, they will enjoy benefits such as:
Increase revenue and profit: Thanks to the revenues from interest rates and services for contracting businesses, there are also opportunities for betting contracts at very high prices.
Limit risks: Banks can verify transparency and feasibility when using capital, and control all activities through payment accounts... helping businesses be more careful in each decision
Increased relationships: Having the opportunity to cooperate with many domestic and foreign organizations and commercial banks, having access to the global financial and banking market, helping to improve the reputation and affirm the position of the business.
4.3. For the national economy
Promoting economic growth: by reconciling the different needs of exporters and importers, thereby balancing supply and demand and stimulating spending.
Modernization of the economy: Trade finance is an important factor to help import and transfer modern technology, support in the production and manufacturing of products, help increase the competitiveness of enterprises.
Market Inclusion: Products and goods compete with each other in the international arena to affirm their position in the import and export industry, thereby creating closer relationships between organizations and businesses.
In short, trade finance in many forms and types has had a strong impact on businesses. Hopefully, with the information shared above, you have grasped the most basic understanding of the types, roles and examples of this activity.
References
ASS. TS. Nguyen Thi Quy. (2012). International Trade Finance. Foreign Trade University. Statistics Publishing House.
TheBank. (2020). Understanding what is trade finance? Viet Na. TheBank.vn e-Magazine
