For all intents and purposes, international trade must be financed, for the reasons stated in Chapter 1. And most or all of international trade is financed by the banking system, whether that is the commercial bank in the United States, the merchant bank in Great Britain, or the universal bank in Germany. Other financial institutions, which specialize in other areas, may also occasionally finance international trade transactions. These include nonbank financial institutions such as savings and investment banks.
International trade transactions are fraught with documentation. Some transactions might have twenty or more different documents that must precede or accompany the shipment. The most important of these documents and their role will be discussed in subsequent sections of this chapter. They include the letter of credit (L/C), the draft, the bill of lading, marine insurance forms, and government approvals, and they include documents for both the shipping and financing part of the international trade transaction.
Five methods of payment are used in international trade: prepayment or cash in advance; letters of credit; drafts, including the use of a banker's acceptance; consignment; and open account. These will be discussed in more detail in this chapter. 1
A number of methods are available for financing international trade. These include accounts receivable financing, factoring, letters of credit, banker's acceptances, working capital financing, medium-term capital