Disadvantages Of Trade Finance

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A trade signifies a transaction between an importer and exporter of goods. Trade finance signifies financing available for the importers and exporters to fund their business cycle. For example, Power Industries in Switzerland exports gasoline to Speed Oil in South Africa for electricity generation and transportation. Here, Power Industries is the exporter and Speed Oil is the importer of gasoline. Speed Oil trades through City bank, which is a pioneer in corporate banking services. This course focuses on the role of a bank in trade finance, various payment methods a bank provides to importers and exporters, the concept of supply chain finance and how a bank supports supply chain financing. Introduction to Trade Finance Trade finance is…show more content…
• If there is ban of currency within the country. For example, Speed Oil may not get their supplies on time from Power Industries, located in Switzerland due to trade restrictions etc and currency control imposed by the importer’s country, Gambia. Mitigation: The bank needs to check the country's political and City economic stability before financing an importer or exporter. Some of the risks due to time and distance are: • Goods may not be received on time and are prone to damage. • Increase in transportation cost may be costly for both the importer and exporter. For example, Power Industries may face the risk that the goods are delayed at customs or damaged during transit. Mitigation: Bank needs to verify whether the importer or exporter has a proper insurance coverage for the goods. The risk caused by increase in interest rate and currency fluctuations will impact both the exporter and the importer. For example, Power Industries may be delayed payment or get less proceeds from the export of gasoline due to exchange rate…show more content…
It is generally used when the importer’s creditworthiness is doubtful and when they have less established operating history. It is usually used in high risk trade relationship and for small export transactions. Following are the features of cash in advance payment method: • It is the most secure method of payment for the exporter. • It includes payment options, such as wire transfer, credit cards and escrow services. • It is an agreement between the importer and exporter which specifies the date of payment, the quality, quantity and shipping method of the goods. • The importer needs to have the required finance to pay the exporter on time. Let's look at the process flow of cash in advance method using the example already discussed. Power Industries is the exporter and Speed Oil is the importer of
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