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What Is the Relationship between Trade and Export Finance?

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  • Written By: Terry Masters
  • Edited By: Shereen Skola
  • Last Modified Date: 30 November 2016
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Trade and export finance work hand in hand, in that export finance makes international sales transactions possible at a level of risk that is acceptable to both the importer and exporter. Without export finance, international sales transactions would place an unacceptable risk burden on one party to the transaction or the other, stymieing the economic growth that both countries would experience as a result of expanded markets. The development of export finance options has supported the globalization of international markets that has been the hallmark of the 21st century and the technology age.

International trade is an important part of a country's economy. One of the key indicators of the strength of one country's economy compared to another is its level of imports to exports. Sales transactions between buyers and sellers located in different countries are often complicated by the distance the goods need to travel before a buyer can take possession and the differences in financial markets and political and economic stability between countries that can prevent timely payment to the seller.

Without third-party export finance options, international trade would belong solely to large corporations. These larger groups have the ability to absorb the risks involved and are better able to finance their own receivables. Small businesses and new companies without established credit would be left out.

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The relationship between trade and export finance is marked by interdependence. Export finance includes third-party programs by government agencies, development banks, export credit agencies and other multinational agencies that help small businesses and other sellers finance the inventory needed to engage in international sales transactions. It also includes the intermediary services provided by issuing and advising banks that extend letters of credit, open accounts and loans to decrease the risks involved in sales transactions. These export finance options make trade possible but also come with costs that drive international finance. The importers, exporters, economies and finance markets all benefit from the interdependency of trade and export finance.

Export finance also acts as a competitive barometer that distinguishes quality vendors from competitors. The availability of financing options that allow sellers to extend credit terms to buyers, or guaranteed payment arrangements that allow buyers to assure sellers they will be paid upon demand, are competitive advantages that parties can use to lock up opportunities and markets. Trade and export finance work together to ensure qualified, reliable businesses are interacting in the marketplace in a way that mitigates risks, ensures efficiency and decreases transaction time.

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