Financing Foreign Trade

Foreign Trade is the main business of the traders of ever country. Almost all the MNCs are heavily involved of foreign trade in addition to their other international activities. So they require finance for all activities related to the trade, working capital, and other services namely letter of credit and acceptances. Hence, the people who are responsible for the management of the MNCs must have the practical knowledge of the institutions and documentary procedures to facilitate the international movement of goods. International Trade or Foreign Trade means the trade between the traders of the two countries with two different types of currencies. A strong constructive belief between them is absolutely essential in order to make the international trade successful. Finance is essential and needed in every step and every shipment. The exporter needs financing to buy or manufacture its goods. Similarly, the importer has to carry these goods in inventory until the goods are sold. Then, it must finance its customer‘s receivables. A financially strong exporter can finance the entire trade cycle out of its own funds by extending credit until the importer has converted these goods into cash. Alternatively, the importer can finance the entire cycle by paying cash in advance.  By taking all factors there are five basic means of payments are in practice i.e. Cash in Advance, Letter of credit, Draft, Consignment and Open Account. There are number of techniques in financing international trade. They are straight bank financing, banker‘s acceptances, discounting, factoring and forfeiting. Historically, banks have been involved in only a single step in international trade transactions such as providing a loan or a letter of credit. But as financing has become an integral part of many trade transactions, U.S, banks—especially major money center banks—have evolved as well. They have gone from financing individual trade deals to providing comprehensive solutions to trade needs. This includes combining bank lending with subsidized funds from government export agencies, international leasing, and other non-bank financing sources, along with political and economic risk insurance.