Three question related international trade financing

Question 1: About international trade financing, it will be reduce the Credit limit amount of banking. So if client want to apply it. They must offer some guaranty. But we can use the cash flow which will be obtained base on the international trade to balance the credit risk. So we think the international trade financing is business which uses the future cash flow as collateral to get current cash flow supporting. The price difference between the cash flow in current and future is profit。It’s right?

Answer to Q1: Your understanding is quite right when referring to the account receivable finance to the seller based on without recourse. e.g. Negotiation without recourse to the beneficiary under L/C. But the trading profit is not only generated from the difference between the cash flow in spot and in future, but mostly from the price difference. The finance interest charged by bank is the cost of the seller, who can receive their A/R in advance.

Question 2: How does the banking confirm the cash flow match goods? And how do the banking manager the risk which be generated during trade transaction period?

Answer to Q2: Before deciding to release a finance deal, A bank must know the customers (seller, buyer, seller and buyer's bank, shipping company, warehouse company and so on..) and the trade transaction background. then A bank will evaluate the target finance deal regarding the various kinds of risks(such as marketing risk, compliance risk, credit risk, operation risk, country risk and so on...) through the risk control department. To control the trade background is to control the trade flow and to control the credit facility is to control the cash flow. However, it is not so easy to say which part is in order to control which kind of risks, because the risk evaluation and controlling system in a bank is very complicated. Banks sometime will rely on the third party to give guarantee to complete the finance deal. The third party maybe a bank or the head office of a global company.

Question 3: The buyer is seller’s branch in the same trade transaction. Seller and buyer’s banks are the same banking. For this banking, it will release twice credit limit for the same client. How can the banking control it?

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