Financing for trades is very important especially in international economics. A country like Dubai which is one of the major exporter of oil and other products need to have effective trade finance for their business to be successful. This does not mean that this financing is not important for domestic trade only that it is more significant when practicing international transactions. The following are some of the roles of trade financing.
Most firms usually require external more than the internal funds for them to cater for the fixed costs. These include the costs such as the payments to the employees. Inventories and input purchases that must be done whether or not the money from the sales comes in.
David Chor, an economist says that trading internationally makes a firm incur more costs than trading domestically. This is as a result of the extra expenditures that are the reason behind the need for external finances. For instance in Dubai, there are many firms that export oil thus they need this financing. For instance they need money to conduct researches about the new oil markets they can venture into.
Exporting activities also have extra costs that are brought about by the shipping duties of the products and also freight insurance. In addition to that, transactions across the boarder usually take longer than the domestic ones therefore they require more resources dedicated to labor. Some of these things are incurred before the revenue is acquired thus the external funds come in handy.
For this reasons, the government of Dubai and the financial institutions have developed this so called finance. It is very different from trading credit as the credit refers to an agreement between the importers and the exporters to take goods and pay on a later date. They may be described as the financial instruments that are created to favor the exporters.
Economists say that more than 90% of international trade in the world relies on this financing. It is therefore very important that it is always provided for the exporters as it improves the whole economy. It is offered for two main reasons; first is to cater for the risks that are involved in this activity like fluctuations in currency and also to work as the working capital before the revenue has been collected.
There are two types of trading finance instruments that firms can use. One of them is through documentary credit and the other is bill validation. In documentary credit, the financial institution involved takes up the responsibility to pay the beneficiary in this case being the exporter on behalf of the buyer who is the importer in this case. This is valid if only they comply with the terms and conditions of the contract.
Bill validation is where the bank of these buyers guarantee to pay the exporter in case he fails to pay in good time. This is different from the above instrument because it does not allow the important to use their money to cater for other things for a certain period of time.
Most firms usually require external more than the internal funds for them to cater for the fixed costs. These include the costs such as the payments to the employees. Inventories and input purchases that must be done whether or not the money from the sales comes in.
David Chor, an economist says that trading internationally makes a firm incur more costs than trading domestically. This is as a result of the extra expenditures that are the reason behind the need for external finances. For instance in Dubai, there are many firms that export oil thus they need this financing. For instance they need money to conduct researches about the new oil markets they can venture into.
Exporting activities also have extra costs that are brought about by the shipping duties of the products and also freight insurance. In addition to that, transactions across the boarder usually take longer than the domestic ones therefore they require more resources dedicated to labor. Some of these things are incurred before the revenue is acquired thus the external funds come in handy.
For this reasons, the government of Dubai and the financial institutions have developed this so called finance. It is very different from trading credit as the credit refers to an agreement between the importers and the exporters to take goods and pay on a later date. They may be described as the financial instruments that are created to favor the exporters.
Economists say that more than 90% of international trade in the world relies on this financing. It is therefore very important that it is always provided for the exporters as it improves the whole economy. It is offered for two main reasons; first is to cater for the risks that are involved in this activity like fluctuations in currency and also to work as the working capital before the revenue has been collected.
There are two types of trading finance instruments that firms can use. One of them is through documentary credit and the other is bill validation. In documentary credit, the financial institution involved takes up the responsibility to pay the beneficiary in this case being the exporter on behalf of the buyer who is the importer in this case. This is valid if only they comply with the terms and conditions of the contract.
Bill validation is where the bank of these buyers guarantee to pay the exporter in case he fails to pay in good time. This is different from the above instrument because it does not allow the important to use their money to cater for other things for a certain period of time.
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