What is the Importance of Trade Finance in Banking?

We live in a truly global environment today. The telephone was the first step towards lightning fast communication across the globe. However, it did not create an impact as significant as the internet. With the internet, it is easy for multi-national banks to provide some of the best private banking services to its customers at a lightning fast speed. Trade finance is one such banking sector that is almost completely reliant on the internet today.

When it comes to banking with some of the largest banks, we cannot forget the importance of trade finance. Here is how trade finance plays a major role in the banking industry today.

Facilitates Global Relationships

Today, trade finance in banking facilitates the building of strong international relationships amongst the nations. It helps the world become a truly global market. With these trade finance banks, the international exporters and importers can finally rely on each other on the legal grounds. The best banks will make sure that there is no foul play involved in the deal and that both the parties receive the benefits of impartial judgment.

Easy Import and Export of Goods

The natural resources of the earth are distributed unevenly across the planet. This is why people need to import and export goods. One country might have excellent mining resources while the other one might be strong on the agricultural grounds. The barter system that was evolved several centuries ago has now taken a completely new and more complex form. Instead of exchange a few pounds of bread for metal, now we exchange a few metric tonnes of the same with proper rules and regulations in place.

The trade finance banks help a company get what it needs while helping a neighboring country with the necessary supplies that it needs.

Controlled Mitigation of Risks

The risk in international trade is almost unavoidable. It is the part and parcel of the trade. One cannot completely avoid risk, but can surely control its amount. The trade finance banks help you control the risks in a more comprehensive and documented manner. This well-defined control allows both the exporter as well as importer to participate in the trade with an open mind. They know that even if the things go sour, the bank will come to their rescue.

Effective Documentation for Taxation Purposes

The taxation norms differ in each country. When you are employed in one country, you deal with mainly two types of taxes, that is income tax and taxes on goods/services. When we talk about international trade, the game gets slightly trickier. There are multiple modes of taxes imposed on both parties from their respective governments. The trade finance banks help the participants of the trade with effective documentation so that they can file their taxes effectively.

Control of Bonds and Cash Flows

Trade finance deals with the exchange of goods, cash as well as bonds. All three of them require a different type of control mechanism. While the cash can be transferred digitally, you need to have a physical shipment of the goods. Controlling these three modes is extremely difficult at an international level. The banks usually have experts on governmental laws and trade finance practices who can help the participants control the flow in a well-defined manner. They keep an active trail of the money in the deal so that you can easily deal with the documentation.

If you are looking for a trade finance bank for your company, it is a good idea to check the reliability and portfolio of the bank before handing over a big project to it.