Trade finance is being defined today in several different ways. But for most businesses, trade finance is usually considered to consist of certain definitions and parameters. Contact an alternative credit company like Audentia for more information.
Despite all the talk of tariff wars and slumping international trade, the importing and exporting of both raw and finished materials continues to grow throughout the world as more and more Third World countries manage to lift their citizens into a thriving consumerism. No matter what form of government a country may have, that government must provide consumers with an ever increasing variety of purchasing options, both locally and from other countries. This is what trade finance is based on, and economists agree that unless there is a major financial meltdown the consumerism that currently drives local and international markets will continue to be a dynamic principle, one that parliaments, presidents, dictators, or bureaucrats try to constrain at their own risk.
Starting at the simplest level, all exporters require their importers to prepay for any shipped goods. This is a long established business model, from the days of the Silk Road and British East India Company. Part of this business model requires the exporter to provide a certified bill of lading for all items sent to an importer -- this is documented proof, in case it’s ever needed, that a shipment was sent from a certain place at a certain time. No insurer is going to do business with an importer who neglects to have this kind of documentation current and ready at hand. In normal times a Letter of Credit from the exporter’s financial institution is used to document and certify that the shipment of material has been sent, and provides a breakdown of each item’s worth. From this Letter of Credit comes the bill of lading that the importer can use to satisfy his or her own creditors and/or vendors that the merchandise is currently in route. The other method used in trade finance, especially in unsettled times, is to convey purchased merchandise to a bonded warehouse, where it can be stored until safe shipment can be guaranteed. Because the warehouse is bonded, or insured, the merchandise in it is fully protected, or bonded, to be free from defect and protected from any injury or breakage. Banks rarely, if ever will go simply on the word of an exporter that a shipment has been sent. They want certified documentation as part of the standard trade finance procedure. This protects both the exporter and the importer in case there is any damage or delay to the shipment of merchandise. This is especially important with perishable items, such as food or livestock. This is where a company like Audentia Capital Management can provide an important bridge between institutional investors and physical producers by working alongside the banking system in bank-originated commodity transactions.