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Meredith
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International trade transactions are often accompanied by international finance transactions. The sellers may require the purchasers to prepay for goods to reduce their risks. This creates risks for the buyers, they want to be sure, that the goods will be delivered.
The purchaser can reduce this risk by requiring documents from the seller which proves that the goods have already been shipped. Financial institutions may join this by providing a letter of credit to the seller. The seller can receive the countervalue of the goods upon presentation of specific documents, for example a bill of lading. The financial institution pays for goods on behalf of the buyer in this case.
Other forms of trade finance include documentary collection, trade credit insurance, export factoring and forfaiting.
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