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Trade finance

By : Murali Ramamurthy, Product Manager, Canara Bank
Industry : Banking Functional Area : Global Business
Activity:  0 comments  3064 views  last activity : 07 06 2010 20:18:04 +0000
For financing  the business,importers and exporters of commodities and goods use the method of Trade finance. This method of financing is the oldest method and still has a lot of importance in trade example of olden trade finance can be known by early days of China and the silk route, Mesopotamia and Europe.

It originated before Europeans settled in America and long before the world’s stock markets were born.
At present it is a multi-billion dollar business. As the world trades more and more goods and commodities are bought and sold, so more and more banks and financiers are needed to lend money to finance the purchase and sale of these goods and commodities.

Imagine you are a trader in cocoa beans in Cote d’Ivoire, buying beans locally and selling them to foreign buyers. To make your purchases, you will need to have money to buy the cocoa up-country in Africa, prior to their export. Where will you find money to make these purchases? And supposing you are the international buyer; the shipper, purchasing from cocoa traders all over West Africa - how will you finance your transactions, which at any one time may exceed your cash reserves? What might be supported by your bank who, if they are traditional lenders, will only lend against your balance sheet?

Here trade finance and structured trade finance is useful – your business can grow and develop if you use the services of a specialist trade finance department who will structure trade finance structures can be tailored to your needs, using the collateral of the goods you are trading, rather than your own balance sheet or other assets.

Goods and commodities have an underlying value of their own. For example, if cocoa beans are worth many hundreds or even thousands of dollars per tonne, then once a big pile of beans is accumulated in one place; in a warehouse or on a ship, it is worth a lot of money. A bank may lend money against the total value of the beans, minus some amount to take account of price and other risks

It is the same for every commodity or trade good which is resaleable. A bank will make a loan as long as the collateral “adds up” and as long as the bank is comfortable with the way the deal is structured between both the buyer and the seller. Of key importance is that if something goes wrong the bank is able to take possession of the commodities or goods and sell them to realise monies to repay any loan amounts outstanding.

Basically, when we talk of structured trade finance we are talking of deals whereby complex arrangements are put in place to ensure a bank can take possession and sell the underlying capital used for the loan.

So, now everybody must have got a clear idea about the importance of trade finance and its benefits.
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