International Journal of Management and Economics Fundamental
71
https://theusajournals.com/index.php/ijmef
VOLUME
Vol.05 Issue 04 2025
PAGE NO.
71-75
10.37547/ijmef/Volume05Issue04-12
Ways to Finance International Trade in Foreign Practice
I.Suleymanov
Academic Supervisor, Assoc. Prof. of the International Finance-Credit Department, Uzbekistan
Payzieva Komila
Master’s student of The Tashkent State University of Economics, Uzbekistan
Received:
28 February 2025;
Accepted:
29 March 2025;
Published:
30 April 2025
Abstract:
Financing international trade is a critical aspect of global commerce, enabling businesses to engage in
cross-border transactions while managing various risks associated with currency fluctuations, payment defaults,
and political instability. This article explores the various methods employed to finance international trade,
including Letters of Credit (LCs), trade credit, trade finance loans, factoring, export credit insurance, foreign
exchange contracts, and emerging tools like blockchain and cryptocurrencies. Each method offers distinct
advantages and challenges, depending on the size of the transaction, the risk profile of the parties involved, and
the specific needs of the business. The article highlights the importance of selecting the right financing strategy
to mitigate risks, optimize cash flow, and ensure the smooth flow of goods and services across borders. By
understanding and utilizing these diverse financing mechanisms, businesses can navigate the complexities of
international trade, foster long-term partnerships, and contribute to the expansion of global economic activity.
Keywords:
International trade, financing, theories, capital.
Introduction:
International trade plays a pivotal role in
the global economy, connecting businesses and
markets across borders. For these transactions to be
executed smoothly and securely, financial institutions
play a crucial role in facilitating trade by providing
various banking instruments. Traditional banking
instruments are widely used in international trade to
mitigate risks, ensure payment, and facilitate the
exchange of goods and services. This article explores
the application of traditional banking instruments in
international trade, focusing on their functions,
advantages, and the role they play in modern trade.
International trade is a key factor in the prosperity of
economies worldwide. Common financing methods
that help facilitating trade between buyers and sellers
across international borders include working capital
financing, cash-in-advance and open accounts. Each of
these methods use a variety of trade finance products
that are available to exporters to increase cash flow and
reduce the risk associated with shipping products
overseas.
Literature Review
International trade theories are simply different
theories to explain international trade. Trade is the
concept of exchanging goods and services between two
people or entities. International trade is then the
concept of this exchange between people or entities in
two different countries.
People or entities trade because they believe that they
benefit from the exchange. They may need or want the
goods or services. While at the surface, this many
sound very simple, there is a great deal of theory,
policy, and business strategy that constitutes
international trade.
In this section, you’ll learn about the different trade
theories that have evolved over the past century and
which are most relevant today. Additionally, you’ll
explore the factors that impact international trade and
how businesses and governments use these factors to
their respective benefits to promote their interests.
“Around 5,200 years ago, Uruk, in southern
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Mesopotamia, was probably the first city the world had
ever seen, housing more than 50,000 people within its
six miles of wall. Uruk, its agriculture made prosperous
by sophisticated irrigation canals, was home to the first
class
of
middlemen,
trade
intermediaries…A
cooperative trade network…set the pattern that would
endure for the next 6,000 years.”Matt Ridley,
“Humans: Why They Triumphed” (
Wall Street Journal,
May 22, 2010, accessed December 20).
In more recent centuries, economists have focused on
trying to understand and explain these trade patterns.
In discussion discussed how Thomas Friedman’s flat
-
world approach segments history into three stages:
Globalization 1.0 from 1492 to 1800, 2.0 from 1800 to
2000, and 3.0 from 2000 to the present. In
Globalization 1.0, nations dominated global expansion.
In Globalization 2.0, multinational companies ascended
and pushed global development. Today, technology
drives Globalization 3.0.
METHODS
To examine the various financing mechanisms for
international trade, we analyzed multiple financial
tools that businesses, banks, and governments employ
to ensure smooth transactions. These financing
methods were explored through a review of scholarly
articles, case studies, and interviews with financial
experts in trade.
International trade plays a pivotal role in the global
economy, as businesses expand their operations across
borders, connecting markets, increasing competition,
and fostering innovation. However, financing
international trade involves navigating complex risks,
such as fluctuating exchange rates, political instability,
payment defaults, and differing legal systems.
Fortunately, there are various financing methods to
help mitigate these risks and ensure the smooth flow of
goods and services between countries. This article
outlines the common methods used to finance
international trade and their respective benefits to
businesses engaged in foreign transactions.
RESULTS AND DISCUSSION
The variety of financing options available for
international trade significantly impacts the way
businesses conduct transactions across borders. Each
method comes with its own set of advantages and
limitations.
To better understand how modern global trade has
evolved, it’s important to understand how countries
traded with one another historically. Over time,
economists have developed theories to explain the
mechanisms of global trade. The main historical
theories are called classical and are from the
perspective of a country, or country-based. By the mid-
twentieth century, the theories began to shift to
explain trade from a firm, rather than a country,
perspective. These theories are referred to as modern
and are firm-based or company-based. Both of these
categories, classical and modern, consist of several
international theories.
Figure 1. Classical or Country-Based Trade Theories
International trade finance refers to the financial
instruments and services designed to facilitate and
support international trade transactions. It provides
exporters with the necessary funds and risk
management tools to mitigate the challenges
associated with cross-border trade.
International trade finance bridges the gap between
the exporter and importer by providing solutions such
as letters of credit, trade credit insurance, and bank
guarantees, which offer security and build trust
between trading partners.
Moreover, it facilitates smoother transaction flows,
thereby enhancing the efficiency and speed of
international trade activities. By doing so, it plays a
critical role in the global economy, enabling businesses
to expand beyond domestic markets and tap into new
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International Journal of Management and Economics Fundamental (ISSN: 2771-2257)
opportunities in foreign markets. This, in turn,
contributes to economic growth and development on a
global scale.
International trade refers to the exchange of goods,
services, and capital between countries. It allows
countries to expand their markets for goods and
services, and can lead to increased economic growth
and higher living standards. International trade also
allows countries to take advantage of their relative
advantages, such as access to natural resources or a
skilled labor force, which can lead to increased
efficiency and competitiveness.
International trade plays a crucial role in the global
economy and is a key driver of economic growth and
development. It allows countries to specialize in the
production of certain goods and services, based on
their natural resources, climate, and other factors, and
then trade these goods and services with other
countries. This can lead to increased efficiency and
productivity, as countries can focus on producing what
they do best, and then trade with other countries for
the goods and services that they need.
International trade finance offers diverse tools, each
tailored to support and safeguard different aspects of
cross-border commercial transactions.
Figure 2. Types of International Trade Finance
Letters of Credit (LC)
- One of the most commonly used
traditional banking instruments in international trade is
the Letter of Credit (LC). An LC is a written commitment
by a bank on behalf of a buyer to pay a seller a specified
amount under agreed-upon conditions, provided that
the seller presents the required documents, such as the
bill of lading or certificate of origin.
The LC reduces the risk of non-payment for the
exporter, as the bank assumes the obligation to pay if
the importer fails to do so. The LC also assures the
importer that the exporter will deliver the goods or
services as agreed, as the bank will only pay upon the
verification of the documents.
Trade Finance Loans
- Trade finance loans are short-
term loans provided by banks to support the funding of
international trade. These loans are often used to cover
the gap between the shipment of goods and the receipt
of payment, ensuring that exporters have the liquidity
they need to conduct business.
1-Table Types of International Trade Finance
(data-driven author development)
Types of International Trade Finance
Letters of Credit (LC)
LCs are a widely used instrument in international trade. They
guarantee payment to the exporter by the importer's bank,
provided the exporter fulfills the agreed-upon terms and
conditions.
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International Journal of Management and Economics Fundamental (ISSN: 2771-2257)
International trade is a crucial driver of economic
growth, development, and integration into the global
economy. However, trade activities often require
significant financial resources, infrastructure, and risk
management tools.
CONCLUSION
The future of international trade financing is being
shaped by technological innovations and the changing
needs of the global economy. The integration of AI and
machine learning will continue to enhance the
efficiency, security, and risk management of trade
finance, while digital currencies and blockchain
technology offer new, faster, and more transparent
ways to conduct cross-border transactions.
In international trade, the need for secure and efficient
financing methods is crucial. The financing methods
discussed in this article offer diverse solutions to the
challenges faced by businesses in foreign markets.
Letters of Credit, trade credit, trade finance loans,
factoring, export credit insurance, and foreign
exchange contracts have long been used to mitigate
risks and improve cash flow. Emerging methods like
crowdfunding
and
blockchain
provide
new
opportunities for businesses to access capital and
streamline cross-border transactions.
As international trade continues to grow and evolve,
businesses must stay informed about the latest
financial tools and adapt to changing market
conditions. Effective trade financing strategies not only
foster the growth of individual businesses but also
contribute to the overall health of the global economy
by facilitating trade and reducing barriers between
countries.
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Export Credit Insurance
Export credit insurance protects exporters against the risk of non-
payment by their international customers. It provides coverage for
both commercial and political risks.
Export Factoring
Export factoring involves selling accounts receivable to a
financial institution, known as a factor, to obtain immediate cash.
The factor assumes the risk of non-payment from international
customers.
Supply Chain Financing
Supply chain financing solutions help exporters by providing
early payment for invoices or receivables in exchange for a
discount. This helps improve cash flow and reduces the risk of
late payments.
Export Working Capital
Loans
These loans provide exporters with working capital to finance
production, purchase raw materials, and cover other operational
expenses related to fulfilling international orders.
Bank Guarantees
This involves a bank offering a guarantee to a seller that it will
fulfill the payment obligations of the buyer in case of default. It's
commonly used in international trade to provide a sense of
security to the seller.
Trade Credit
This is a form of credit extended by the supplier to the buyer,
allowing them to pay for the goods at a later date. It's a common
practice in international trade to help buyers manage their cash
flow
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International Journal of Management and Economics Fundamental (ISSN: 2771-2257)
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