Trade finance & Green trade finance
Definition
Trade finance is a range of banking solutions designed to facilitate international trade transactions for importers and exporters.
Scope of application
The scope of application of Trade finance is wide and diversified. The term "Trade" refers here to the securing of transactions, both for exporters and importers. It includes solutions that reduce the risks incurred by both exporters (counterparty risk, for example) and importers (delivery risk). Documentary credit and international guarantees can be useful in covering these different risks.
The term "finance" refers to the problem of financing working capital requirements (WCR), which is more pronounced in international trade than in domestic trade. This financing can take two forms:
- pre-financing (financing before shipment of the goods) which is obtained, for example, against the issue of market guarantees (advance payment guarantee);
- post-financing, which allows the exporter to grant significant payment delays, while being paid on sight, which in turn also constitutes a source of post-financing for the importer. In concrete terms, discounting or mobilization of documentary credit meets this objective.
Green Trade Finance
Green Trade Finance is increasingly being discussed. How is it positioned in relation to Trade Finance?
The term "green" here refers to environmental issues, one of the essential components of Social and Environmental Responsibility (SER). As soon as the transaction (underlying) is part of a project to promote the environment (e.g. wind farm, improved water management, clean transport, etc.) and trade finance solutions are involved in this project (documentary credits, international guarantees), we speak of Green Trade Finance.
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Video:
[Woman 1] Okay, let's stop here. Look at that view!
[Woman 2] Wow. It's absolutely stunning. It's so nice being just us girls. Listen, the other day, I asked Jeremy to lend me €1,000. His best friend! He asked for some kind of guarantee. Can you believe it? I gave my grandmother's ring.
[Woman 1] Well, don't forget you still owe him €3,000. That's not a lot of collateral.
[Woman 2] Collateral? What's that?
[Woman 1] It's something we do with the bank. When you have a financial transaction with one or more parties, the borrower will secure the transaction risk by pledging collateral in the form of cash, securities, or assets to the lender as a guarantee. Dealing with all that is known as “collateral management”.
[Woman 2] Okay, well, how does it work?
[Woman 1] It's simple. A business needs a lot of cash to pay a supplier. It also owns a large equity portfolio, a bit like you: you need cash and you own a ring. Understand? In exchange for a cash loan, the bank will ask the business to commit part of its equity portfolio as collateral to secure the loan. Collateral management is a technique the bank uses to quickly identify what can be committed as collateral so that a transaction can be performed. It's a little like knowing the price of your ring.
[Woman 2] Let me get this straight. Whoever is in charge of collateral management also decides what qualifies as collateral? Seriously? You really need to be sure of yourself in that case.
[Woman 1] Well, exactly. They're responsible if they get it wrong.
[Woman 2] That's insane. Say, I was wondering if I could ask you something…
[Woman 1] Me? Sure.
[Woman 2] I don't suppose you could lend me a thousand euros?
[Woman 1] Well, that depends. I don't know. Do you have collateral?
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