Supply trade finance is a complex form of international finance related to international trade. It is used when there are buyers and sellers of goods in different countries, who use different banking systems and laws. The main reason companies use supply trade finance intermediaries is to help mitigate the risk of international trade.
So What Is It?
Supply trade finance is when a company uses a bank (usually an international bank) to facilitate the transfer of goods or services, while also facilitating the payment for said goods or services in exchange. Basically, if you’re a US-based company, you don’t want to pay for goods from China until you are guaranteed they are on their way. And for the Chinese company, you don’t want to ship goods overseas, and then not get paid. A supply trade finance account helps with this.
How Does It Work
Using the same example, the US-based company would call their bank to prepay for the goods being shipped from China. The US bank, in turn, would provide a letter of credit to the Chinese company’s Chinese bank, which would have certain stipulations. The Chinese bank would then loan the Chinese company the money to make the goods, based on the stipulations in the letter of credit.
To ensure everyone gets paid appropriately, the terms are usually that the Chinese company has to provide proof of shipping (a bill of lading) to get the funds actually wired to their bank to repay their loan.
Once the goods are shipped, the entire chain of events works in reverse, and every company and bank gets made whole by the transfer of funds and goods.
Other things that international banks focus on in supply trade finance is making sure the deal is fully completed. This could mean arranging for other trade documents as needed, especially in transit, and even insuring the goods while they are in transit.
Basically, supply trade finance involves a lot of different steps in making sure that international trade can take place securely and quickly.