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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, a certain economist said that trading across many countries makes a business incur more costs compared to trading locally. This is because of the extra expenses that are the main reason behind the requirement of external finances. For example Dubai has several firms that sell oil therefore they require this financing to survive. For instance they require money to conduct studies about the new markets they can speculate.
International dealings also make a business to undergo some additional costs because of the shipping liabilities and also transport insurance. Making a deal across borders also takes a longer span of time compared to local transactions which leads to extra working time for the workers therefore more resources are spent on their salaries. All these factors need to be handled before the revenue is earned therefore the external reserves help a lot.
Because of the above reasons, financial institutions and the rule of Dubai really need to support this particular finance because international economics cater for a big part of their revenue. Trade credit should not be confused with this policy as it means an understanding between the sellers and buyers to carry out their transactions and have the payments done at a later date. They are usually created to favor 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, a certain economist said that trading across many countries makes a business incur more costs compared to trading locally. This is because of the extra expenses that are the main reason behind the requirement of external finances. For example Dubai has several firms that sell oil therefore they require this financing to survive. For instance they require money to conduct studies about the new markets they can speculate.
International dealings also make a business to undergo some additional costs because of the shipping liabilities and also transport insurance. Making a deal across borders also takes a longer span of time compared to local transactions which leads to extra working time for the workers therefore more resources are spent on their salaries. All these factors need to be handled before the revenue is earned therefore the external reserves help a lot.
Because of the above reasons, financial institutions and the rule of Dubai really need to support this particular finance because international economics cater for a big part of their revenue. Trade credit should not be confused with this policy as it means an understanding between the sellers and buyers to carry out their transactions and have the payments done at a later date. They are usually created to favor 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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