Trade Finance Methods Essay

Trade Finance Methods Essay

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This report will review the main trade finance methods and how they affect function legally and practically. The main document used in world trade is the letter of credit and this will reviewed in dept together with the doctrine of strict compliance and autonomy.
Finance Methods
To make trade possible there is a need for capital, which can be used to pay for the goods bought. The capital can come from several sources depending on the scope of the trade. If it is trade of low cost items in small values, it is possible to get credit in a local bank. The complexity becomes larger if the goods are more capital intensive. There might be loans involved, currency needs to be traded (FOREX trade), market swings in the commodity (futures and derivates) and transport risk (insurance) and similar. The finance market can service these issues in several ways. They can also help seller and buyer with the payment involved in a trade.
Bills of Exchange
There are several trade specific financial methods, which are used to service trade. The common form is to issue a bill of exchange where the buyer gives the seller the right to draw his account on a specific date and amount. These bills are most often conditional to some form of duty to be made before the payment goes trough. Further is possible for the buyer to issue document against payment (D/P). This gives the buyer possibilities to retain payment until he receives the documents according to the sales contract. The seller retains the goods until he receives payment. The similar document against acceptance (D/A) also gives the buyer the possibility to retain credit from the bank on the behalf of the seller. The sellers bank is then in charge of collecting the payment. Th...

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...d is interested in the commission involved in setting up a letter of credit but they do have a big responsibility to make sure that the LC match the sales documents. If they are neglecting in their auditing of the LC they might be held liable to the buyer and therefore the bank must follow the UCP 600

There are several ways of financing trade, but the most significant in trade between two parties with no history is the letter of credit. The reason being it secures the seller from not being paid and the buyer from not being delivered the goods. However the letter of credit has strict guidelines to how it should comply with the sales contract. Banks uses the UCP600 to assed the LC and a large proportion of the LC rejected. This is an issue and it might make the LC less attractive but then again there are few alternatives, which has the same security.

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