September 22, 2024

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Trade Finance Basic Concepts | Methods of Payment | Parties Involved #Finance

Trade Finance Basic Concepts | Methods of Payment | Parties Involved #Finance


international Trade and Finance? It’s nothing but providing goods or services across the border. The process of financing such trade is international trade

href="https://cashnews.co/finance" style="font-weight: bold; color: #1a73e8; text-decoration: none;">Finance and the same thing happening inside the border of the country is domestic or inland trade text-decoration: none;">Finance. Now what are the roles or players associated with this export import business? First is of course the exporter of the seller of the goods, next is the importers or the buyer of the goods, next major player are the banks, the banks basically act as

intermediaries between the exporter and the importer, sometimes just as agents and sometimes taking up much more responsibility than mere agents, we will talk about this later. Next are the transport companies, they are involved in the actual movement of the goods, if it is international movement

then its generally the shipping companies and Airlines, if it is inland movement it’s mainly by lorry trucks or rail. Now the journey made by the goods is a long one in international trade and even in inland trade during the journey from the seller to the buyer many unforeseen circumstances

may come, now Insurance companies insure the goods so that the risk of financial loss due to damaged goods can be avoided. Now there are many regulatory bodies in international trade but mainly there are World Trade Organization or WTO and the International Chamber of Commerce or

ICC, now WTO is basically an inter governmental organization that regulates the trade between various countries and ICC’s main role is setting up the rules in international trade. Now the rules are voluntary, mind it, but though they are voluntary they are observed in almost all kinds of

international trade. Now when the importer is buying goods without actually seeing them he may ask for various kind of certificates from the exporter, for example, if he is buying some kind of food item then he may ask for a health certificate, if he is buying something whose chemical composition

is important to him then he may ask for a test report from an independent laboratory, so various kind of certificates like these are there, one certificate worth mentioning is the certificate of origin which is usually provided by the chamber of commerce which certifies the country of origin of the

goods. now in trade Finance there are basically three kinds of movements happening, what are they? we have the exporter and the importer and the first kind of movement is

basically the movement of the goods happening from the exporter to the importer, next is the movement of the documents related to this goods, that is also happening from the exporter to the importer and keep in mind that these documents are very important because without this documents the importer

will not be able to release the goods in his own country and last but not the least the payment made by the importer to the exporter. Now depending on the timing of these three movements we basically have five different kinds of payment methods in international trade.Let’s see what they are

– advance payment, open account or cash on delivery, collection of bills, letter of Credit and bank payment obligation. It’s not much used in India, it’s are basically a new payment tool. Now let’s see each one by one. Now advance payment the name itself

suggests what it is, we have the buyer and the seller and the buyer is first making the payment to the seller and only after the seller gets the payment he is sending the goods to the buyer now, here the main parties involved are the buyer and the seller or the importer and the exporter, no banks

are getting involved directly so there is no risk mitigation by banks and the importer is at a very high risk because he is parting with the payment without getting the goods, then why will anyone do this? this usually happens when the importer is new and small in business size compared to the

exporter and he has no other way but to trust the exporter next is the open account or cash on delivery, it’s just the opposite of advance payment, we have the importer and exporter and the exporter is first sending the goods and only after getting the goods the importer is sending the

payment, again there is no risk mitigation by banks and just the opposite the exporter is at very high risk and again usually this happens when the exporter is new or small and business size compared to the importer let’s have an overview of collections and letter of Credit

what are they? now in both the cases the movement of the documents happen through the exporter’s and the importer’s banks instead of the exporter directly sending it to the importer, in collections the importer’s Bank hands over the document to the importer only after the importer

pays immediately or promises to pay at a future date, now you already know that these documents are very important for the importer because without the documents he cannot release the goods so here in documentary collections the exporter is at a much better control situation because he knows that

if the importer does not pay immediately or he does not promise to pay at a future date he will not be able to release the goods so he is in a better control situation, but the importer’s bank have no responsibility if no payment is made, where as in the letter of Credit the

banks are not only handing over the document to the importer according to the LC terms, that is either paying immediately or promising to pay at a future date, LC issuing bank gives irrevocable undertaking that if the importer fails to pay, the bank will pay the exporter, provided the LC terms are

followed, so here the exporter is getting a sort of payment guarantee, so it is a much robust and stronger payment method than documentary collections, now this is just an overview, short overview of collections and letter of Credit, we will be talking in detail about both of these

in our later tutorials, so don’t worry. Now we have already told that ICC publishes various kind of trade Finance rules, now you should know which is for which kind of

payment method, let’s see for LC we have uniform customs and practice of documentary Credit version 600, also known as UCP or UCPDC 600, to support this we have something called ISBP 745, international standard banking practice, for collections we have uniform rules for

collection 522 or URC 522, for the movement of the goods we have international commercial terms incoterms 2010, a new version is coming up Incoterms 2020 and there are some other publications like URR, URDG etc

Now that you’re fully informed, don’t miss this amazing video on Trade Finance Basic Concepts | Methods of Payment | Parties Involved.
With over 146312 views, this video is a must-watch for anyone interested in Finance.

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50 thoughts on “Trade Finance Basic Concepts | Methods of Payment | Parties Involved #Finance”

  1. ********************************************************************
    For beginners in Trade Finance, the Gist of Trade Finance in simple language
    https://www.bankon.school/courses/international-trade-finance-certification
    ********************************************************************
    Learn the ESSENTIALS of Letter of Credit and UCP 600!!
    Three Hours of power learning in simple language explained with examples/ Real life documents/ CDCS FAQs –
    https://www.bankon.school/courses/international-trade-finance-letter-of-credit-ucp-600
    ********************************************************************
    ********************************************************************************************
    For full course on SWIFT MT and ISO 20022 MX Messages including Overview of SWIFT GPI
    https://www.bankon.school/courses/swift-mt-mx-iso-20022-message-types
    ********************************************************************************************
    For a thorough and extensive understanding of Incoterms 2020 in easy words https://www.bankon.school/courses/incoterms-2020-training
    ********************************************************************

    Reply

  7. Hi. Thanks for the great explaining of Letter of Credit. I wish that buyers of goods should know, because a lot of buyers still do not understand L/C. For my business any buyers who want my goods and have not Letter of Credit we can not do business with them because they waist time.
    WALKERS DOCUMENTATION FIRM

    Reply

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  33. Have been trying to understand trade finance watching youtube videos, but out of all, this is the one which made things so very clear to me… and the reason being, things are explained in such layman terms that anybody can understand. Thank you so very much! I immediately subscribed to your channel and started watching all your other videos as well, related to trade finance. Thank you. Do you have any video on trade loan, searched but couldn't find it.

    Reply

  36. This is fantastic video.Ur way of explanation is incredible. I have seen your swift videos.. They are amazing. Will u please provide me tuition or training. I am a banking professional trying to get into payments domain. I have worked with HSBC and BARCLAYS. Please can you help My number 9007737156.

    Reply

  41. Hi, I’ve watched the entire playlist of Trade banking, it was very gud and understandable can you please post a detailed video on Bank Guarantees, it will be really helpful for all…

    Reply

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