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By obtaining lines of credit from government-insured banking institutions or credit providers, exporters and importers can engage in continuous international trade. Without interruptions due to financial cutbacks in production schedules, delayed products shipments or late order payments by customers, these global traders can operate stabilized businesses. This valuable form of commercial financing is available in many different international currencies.
What are the primary benefits offered by lines of credit for international trade?
Lines of credit for international trade can be structured as general purpose lines of credit or as project lines of credit. A general purpose line of credit facilitates the buying of different capital products or services by varied types of international buyers. A project line of credit enables the buying of a wide variety of capital products or services by a singular international purchaser. Benefits received through use of lines of credit by global manufacturers, exporters and importers include the following:
How does a line of credit actually work in international trade transactions?
A line of credit can greatly simplify and facilitate international trade transactions. First, an exporter guarantees the borrower's repayment of the credit loan to the lending bank. The bank then extends a loan payment to the exporter. After receiving the loan, the exporter delivers capital goods or renders services to the buyer. Once goods and services have been received by the buyer, the buyer repays its borrowing (local) bank. The bank issues a line of credit to the borrower, and the borrower pays back the extended loan under the line of credit. The exporter's bank is repaid in full.
If all parties involved in a trade transaction agree, the buyer is often allowed to borrow in its own right. If such an agreement cannot be reached, a bank located within the borrower's country will act as a borrower. When a general purpose line of credit is obtained, a bank in the borrower's country will usually act as borrower. At times, having two banks involved in the arrangement and administration of lines of credit to enable international trade can result in smoother, faster lending and repayment schedules.
Some exporters and importers actually prefer using a bank line of credit for global trade of products and services rather than other forms of funding such as receivables financing or inventory lending. Although interest rates are generally higher on lines of credit and they often are more difficult to obtain than other types of financing, they are very convenient for regular borrowing by parties engaged in ongoing trade.
Once approved, a line of credit is available to the borrower to be drawn against for the duration of its term. Of course, it can also be helpful to have the extended time of several years for repayment of monies due on a line of credit, especially during periods of economic uncertainty or business instability. Bank loans and lines of credit are also fully insured, and terms of their administration and use are carefully monitored by the bank to ensure that all activities involving these credit lines are lawful and appropriate.
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