With the constantly changing trends in the international trade market, financial services have a vital role to play. According to a recent study, around 225 countries are engaged in global trading making a business worth $9 trillion annually.
Earlier, only major international banks were the financial service providers. With the advent of liberalization of trade policies, several other financial services have established themselves in the market for the purpose of supporting world trade.
Financial institutions such as banks offer various import trade finance services. Under the pre-import working capital program for importers, finance is provided for the purchase of materials, services and personnel in order to fulfill an import transaction.
Similarly, programs such as purchase order financing provide importers with finances for the purpose of purchasing materials or manufacturing products that have been already sold to a foreign customer. Apart from these, various finance programs are available that provide finance on imports based on a company’s equity value, offer debt collection services and provide expertise on importation of equipment. They even provide importers with a uniform mode of payment through an import letter of credit and also provide assurance to the supplier regarding the payment of their shipment.
While completing an import trade transaction, importers and exporters usually agree upon certain trade terms for the purpose of reducing risks. There are various means of negotiating terms during import trade transactions.
Consignment Purchase – This is the most advantageous mode of settlement for the importer. In this agreement, the buyer usually releases payment only after he has sold the product to the end user.
Cash-in-advance (Pre-payment) – In this agreement, the buyer has to make an advance payment to the seller before the purchase of a product.
Down Payment – This is most advantageous agreement for the seller. Here the importer has to make a complete payment even before the product is shipped by the exporter.
Open Account – In this type of agreement, the buyer usually agrees to make the payment on a certain date in the future. However, the commitment of the buyer is never supported by any legal agreement.
Letter of Credit – This is the most widely used trade finance agreement around the world. Letter of credit is a formal letter issued by an international bank offering assurance to the seller regarding the payment of this product.
Documentary Collections – In this type of agreement, the trade transaction is negotiated and documents are exchanged between importer and exporter through a bank.