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The Role of Commercial Banks in the International Trade

By christinaricci : A how to tutorial about export import financing export insurance, Business with step by step guide from christinaricci.

Most commercial banks worldwide avoid dealing with foreign markets and buyers. Not only that this task is daunting but covering participants outside similar jurisdiction poses high risk of default and bankruptcy. In fact, even most exporters do not choose commercial banks as their major source of financing for comparable reasons. Overseas transactions become complex if banks have no direct communication with governing bodies of the exporters’ foreign clients.

However, commercial banks are willing to finance companies with low risks of business with foreign clients. In this case, both parties can trust each other based on the lack of other options. On the other hand, commercial banks usually require or demand export insurance to at least give their interest proper protection from the same risks. Therefore, they still need the help of government or federally funded banks offering that kind of insurance.

Various services can be offered to an exporting company in close relationship with a commercial bank. It oversees financing transactions; checks credit records of potential buyers abroad, and smoothes out currency exchanges by communicating with foreign banks. Similar to federally funded banks, a commercial bank can also offer loan programs for foreign buyers to fuel the trade between them and it’s served company.

At the beginning of the export process, the bank can provide short-term financing in the form of pre-shipment credit to the company requesting for export import financing. Such a benefit is given only to companies long associated with the commercial bank. Nonetheless, commercial banks also seek protection for their interest, and thus maintain good relationship with the exporters. This mutual insurance between them becomes an assurance that the business is not leading to default.

In the absence of export insurance provided by a federally funded bank, commercial banks secure repayment by maintaining long-term relationship with their clients. Based on trust and experience, export financing can easily be handed for the exporter’s continuing business. Relationship reduces the fear of commercial banks to make an unstable investment in international trade.

Another way to manage the risk in this type of transaction is to build good and long-term relationship with foreign buyers. While the banks offer financing options to foreign buyers aside from export import financing to exporters, it is important that there are mutually associated to insure repayment, although the bank can take advantage of financial factoring options involving another financial institution to avoid bankruptcy in case of major default.

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