Trade finance is an opportunity to mitigate risks throughout the lifecycle of a certain transaction. The best trade finance banks in the world provide trade finance to cover the risks of non-payment of buyers with documentary credit issued by the bank. Exporters receive funds in advance upon presenting the documents fulfilling terms of credit.
Global trade finance involves the use of standby documentary credits that act as a guarantee. Such credits are only activated in case of non-payment. Banks also use guaranteed to stand behind contracts. Documentary credits like a letter of credit issued for facilitating trade across borders.
To ensure cross-border relationship and global trade finance, some bonds are used, such as bid bonds. They support up to 5 percent of customer’s tender. If such a tender is successful and suppliers accept it, a performance bond is created. This is to make sure the contract you have entered into is performed and the bond may have a contract value of up to 20 percent.
Some contracts lay down advance payment rules to be made prior to goods delivery. In such cases, an advance payment bond is created to make sure repayment of advance is done if any clause of the agreement is unfulfilled. When it concerns machinery or plant purchase, the purchaser may have to hold back 10 percent per year. Nevertheless, if sellers require 100 percent value, a retention bond may be provided to cover the shortfall. Hence, retention bond is provided by the bank of the exporter in favour of the buyer.
Payment guarantee is used to ensure exporter receives payment if payment obligations are unfulfilled.
Documentary Collections for Global Trade Finance
Best trade finance banks usually refer to documentary collections – payment service where exporters and importers transact using a banking channel. Using this, banks control goods and title documents. Once the correspondent bank feels satisfied with the trade in a different jurisdiction, they may choose to release those documents.
Seller’s financier releases documents only when the bill of exchange is accepted or payment is done. The advantage of collection type payment is the commitment to pay upon the receipt of all necessary documents managed through the banking system.