InvestorQ : Why is trade finance an important source of funding?
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Why is trade finance an important source of funding?

Answer
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3 months ago
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First thing is, trade finance represents the financial instruments and products that are used by companies so that they can carry on international trade and commerce easily. So, the main function of trade finance is to act as a third party and remove the payment risk and supply risk, while exported gets accelerated receivables and the importer gets extended credit.

Trade financing is an important source of funding because it reduces the risk for the exporter. Ideally, an exporter wants the importer to make all the payments upfront so that he can avoid any risk that the importer may accept the shipment but refuses to pay for the goods.

However, the case is the same when the importer makes an upfront payment, the risk is shifted to the importer that the exporter receives the entire payment and denies any delivery of goods. So, to cope with such a situation trade financing plays a crucial role. It helps in reducing the risk by reconciling the divergent needs of an exporter and importer.

So, in the case of international trade, it becomes crucial. There have been changes in policies due to COVID-19, which is affecting the short-term trade financing mainly. These finances became extremely vulnerable due to increased prices and reduced overall availability. So, there have been liquidity issues as well.
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