Commercial banks play important roles in the export-import industry. Although most of them avoid getting involved in international business transactions, others still take the risk to support starting export companies. Trade financing has been helpful to many international businesses because it eliminates risks of default or non-repayment by foreign buyers. Generally, commercial banks are affiliated with government financial institutions in keeping export and import alive among countries.
Without export and import, globalization will not materialize. The products found in one country cannot be availed by another and vice versa. The purpose of this industry is to supply goods that are abundant in one country to another country apparently scarce from but in great need of such goods. In effect, healthy exchanges and relationships are formed. Banks are not directly involved in the business but only serve as support or rescue if ever a business fails.
Most governments provide financing for export businesses in response to the demand for globalization. It is the government’s duty to improve the economy of the country and one strategy is to provide insurance to potential exporters and financing to potential foreign clients until the business relationship can stand on its own. The Export-Import Bank of the United States, for example, takes 80 percent of the repayment insurance for any applying export business.
Compared with commercial banks, the Export-Import Bank of the United States is stable and can support even high-risk businesses. Commercial banks are small and prefer to insure only those companies with almost perfect credit risk. Most of them only offer financing more than insurances, thereby requiring a business to obtain insurance from a federally funded bank such as the IM Bank to get loan.
Commercial banks can perform various tasks that an export company may need in the long run, aside from financing. They can offer credit checks to potential buyers to protect their clients from potential business damage, and contracts with overseas banks to smooth out any currency exchanges. A commercial bank’s finance of international trade is limited though.
To obtain security for their interest, commercial banks rely mainly on government authorities’ guarantee, unless they have established years of business relationship with the export companies as their clients. With non-materially protected finance of international trade such as the one mentioned, commercial banks protect their interest by carefully determining the statuses of their clients’ clients. That way, repayment has higher probability rate.