Abstract: Trade financing is a way of corporate financing and a financial service provided by commercial banks. In trade finance, banks use structured short-term financing tools to finance assets such as inventories and advances in commodity transactions. Trade financing business includes credit issuance, import bill payment, delivery guarantee, etc. When choosing trade finance as a financing method, you need to have a general understanding of trade finance types and trade finance business risks. Let’s learn about it together! 1. What does trade finance mean?

Trade finance refers to the use of structural short-term financing tools by banks in commodity transactions, based on inventory and advance payments in commodity transactions (such as crude oil, metals, grains, etc.) , financing of assets such as accounts receivable. Borrowers in trade financing have no other production and business activities except commodity sales revenue as a source of repayment. They have no substantial assets on the balance sheet and no independent repayment ability. Trade financing factors provide non-recourse trade financing with convenient, simple and easy procedures, which basically solves the exporter's short-term capital problems of credit sales and occupation in transit.

2. What are the types of trade financing?

1. Import bill

Refers to the issuing bank after receiving the documents under the letter of credit and reviewing the documents. , based on the "Import Bill Advance Agreement" signed with the applicant and the trust receipt submitted by the applicant, the external payment will be made in advance and the bill will be released. After the issuance applicant takes delivery of the goods against the voucher and sells it in the market, the principal and interest of the advance will be returned to the issuing bank.

2. Overdraft within the limit

Based on the customer’s credit status and mortgage (pledge) and guarantee situation, the bank will determine an overdraft limit for the customer on his bank current account, allowing the customer to Overdraft can be made within the limit based on capital needs, and the overdraft balance can be automatically offset with sales revenue from normal operations.

3. Import payment

According to the financing agreement signed with a foreign bank (mostly its overseas branches), the issuing bank will contact the applicant before issuing a letter of credit. Sign the "Payment Agreement under the Import Letter of Credit", go to the unit to release the bill based on the "Trust Receipt" submitted by the applicant for the issuance of the L/C, and telegraph the foreign bank for payment. The applicant for issuing the certificate shall pay the principal and interest paid on behalf of the applicant on the due date.

4. Fake Usance Letter of Credit

Fake Usance Letter of Credit is a credit by which the beneficiary can draw a usance draft and get the payment immediately after being accepted by the bank and discounted. certificate. The bill of exchange issued by the exporter of such a letter of credit is still a usance bill, but the bill can be obtained immediately by discounting the bill, and the importer will bear the discount costs incurred. The exporter can also earn interest if he is willing to accept forward payment. For importers, they can get the shipping documents first to take delivery of the goods without having to pay immediately, so that they can get the benefit of deferred payment.

3. What business does trade financing include?

1. Export collection and bill transfer

After submitting the documents, the exporter who adopts the collection and settlement method entrusts a bank to act on his behalf. While collecting payment from the importer, the collecting bank is required to advance part or all of the payment for goods, and the bank advance will be returned to the bank after the collection payment is received.

2. Export factoring bill

After obtaining the credit line from the import factor, the exporter will deliver the goods and submit the invoice and related documents to the export factor (bank). When collecting payment, the bank provides financing for no more than 80% of the invoice amount in the form of advance payment.

3. Import collection bill

After receiving the full set of collection documents sent by the exporter through the collecting bank, the collecting bank will, based on the bill application submitted by the importer, With the trust receipt and the "Import Collection Advance Agreement" signed between the collecting bank and the importer, the payment is made first and the bill is released. The importer takes delivery of the goods against the bill and returns the principal and interest to the collecting bank with the payment after the sale.

IV. What are the risks of trade finance business?

1. Insufficient understanding of the importance and risks of trade finance business

First of all, senior managers of commercial banks and relevant departments lack understanding and experience in international trade financing business, and generally have a superficial understanding of the risks of international trade financing business, which is manifested in two tendencies: First, they mistakenly believe that international trade financing does not require the use of actual funds, only Lending documents or issuing letters of credit can earn handling fees and financing interest from customers, which is a zero-risk business. This directly led to the formation of non-performing bank assets due to a large number of letter of credit advances in the mid-1990s; secondly, when problems arise, , also believes that international trade financing risks are very high, and the measures taken have made international trade financing credit more difficult than ordinary loans, and the approval time is long, which has restricted the development of this business.

2. The bank lacks an effective prevention and management system, and the risk control methods are backward.

The risks involved in international trade financing business include customer risk, country risk, foreign agency risk, and international market risks and internal operational risks. The management of these risks requires advanced technical means to efficiently and organically connect relevant bank departments and branches. At present, our country's banks are lagging behind in the processing procedures for foreign exchange business. The businesses between different branches and different departments operate independently of each other. There is a lack of full sharing of network resources and a lack of unified coordination and management, so that it is impossible to achieve perfect results. *The purpose of sharing resources, monitoring risks, and restricting each other.

3. Disordered competition in financing business undermines risk management standards

my country has carried out international trade financing business for a shorter time than foreign countries, the market is not yet mature, and various restraint mechanisms are not yet complete. With the increasingly fierce competition in the international settlement business of commercial banks, each bank's business form is relatively simple. In order to strive for a larger market share, they are competing to attract customers with preferential conditions, and the credit review and requirements for corporate customers are getting lower and lower. , the control of trade financing risks has been relaxed. For example, some banks have reduced the proportion of deposits required for issuance of certificates; some have even adopted credit issuance and waived deposits; some have issued external loans when the deposits are insufficient and the guarantee or mortgage procedures are incomplete. Issuing usance letters of credit, etc., these practices undermine risk management standards and exacerbate the risks of banks' trade finance business.