Role of Banks in International Trade

Role of Banks in International Trade

It is impossible to be in international trade without involving your bank for all the services they provide such as advice on financial issues and the potential risks involved. It is true that one critical hurdle for SMEs is the lack of information on international trade processes, documentation and banking procedures necessary to carry on with business abroad. For result oriented and cost effective international trade, you will very definitely need access to accurate and timely information and a sound knowledge of banking.

Payment Options in International Trade

Quite obviously all payments in an international trade are made through bank either by way of wire transfer or check with the latter not being preferred for not being the quickest. The following are some of the common ways of payment modes in international trade.

1. Banker’s Draft is a cheaper option and easier to obtain but there is a risk of loss in transit. The only advantage it has against check is quicker credit that the exporter gets.

2. Letter of Credit. This international trade instrument is mutually convenient for both the parties. The exporter gets paid once he produces the copy of BoL (bill of lading) which he receives from the shipping company and the LoC, to the bank, regardless of whether the consignment as arrived at destination or not.

3. Wire transfer is by far the fastest and the cheapest option in which the importer will instruct his bank to transfer the amount to the exporter’s bank account. The first time, the transfer happens in about 10-15 days depending on the destination country and the routing bank. International wire transfers are made through intermediary banks/correspondent banks.

4. Although not in a big way, some China manufacturers accept Paypal for smaller amounts such as US$5,000 but require 3{919468b76a1b111b1791bdf3e51426d8562c963af300c016649515c15309dd6c} extra to compensate for the charges. Paypal is the quickest and easiest mode of payment in international trade.

Banks that are serving international trade, understand the crucial role they are required to play. Many large banks maintain worldwide correspondents to provide quick delivery of actual currency, wired money or drafts. You may choose your bank for international trade account on the basis of whether the bank can extend advances against the account receivables. Bank may, however, require your account secured through export credit insurance provided by Export Import Bank of United States. Banks also let you enter into forward exchange contract with your bank and fix the amount of the foreign exchange you receive when you are dealing in convertible currencies. You need your bank to be with you as long as you are in international trade.

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