Export or Trade Finance - Explained
What is Export or Trade Finance?
Written by J. Mance Gordon
Updated at April 21st, 2024
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What is Export Finance?
Export finance, also known as trade finance, refers to financing or funding activities related to export, import, and international trade. Export finance may include letters of credit, export insurance, shipment insurance, and export credit. There are many financial institutions that are involved in export financing, including banks, insurance companies, export credit agencies, and other related companies.
What is Trade Finance?
As trades are not limited to national boundaries and now businesses are increasingly engaged in international trade, there is a need for insurance against such risk. For instance, a business may face liquidity risk, shipment risk, political risk, currency risk, and credit risk.
Trade or export finance overcomes payment or credit risk and supply related risks by acting as an intermediary with the third party. The basic function of export finance is to extend credit to the importer and guarantee payment to the exporter. Many firms provide export financing services including banks, financial institutions, insurance companies, and suppliers. According to the report of the World Trade Organization (WTO) 80 to 90 percent of international trade depends on export financing.