Why is trade financing important? International trade accounts for around 3% of GDP, employing millions of people around the world. Some 90% of global trade is reliant on supply chain and trade finance, totalling USD $10 tn a year. Trade finance is a form of cash flow lending which helps finance trade flows, global supply chains and procurement of goods both domestically and internationally.
What does trade finance include?
Bonds and Guarantees
Lending facilities
Issuing Letters of Credit (LCs)
Export factoring (companies receive funds against invoices or accounts receivable)
Forfaiting (purchasing the receivables or traded goods from an exporter)
Receivables financing, invoice factoring and invoice discounting
Export credits (to reduce risks to funders when providing trade or supply chain finance)
Insurance (during delivery and shipping, also covers currency risk and exposure)
Supply Chain Finance
Foreign Exchange and Currency Products
What are the methods of payment for trade finance? Cash Advances As the least risky product for the seller, a cash advance requires payment to the exporter or seller before the goods or services have been shipped. Cash advances are very common with lower value orders, and helps provide exporters / sellers with up front cash to ship the goods, and no risk of late or no payment. Letters of Credit (LCs) Letters of credit (LCs), also known as documentary credits are financial, legally binding instruments, issued by banks or specialist trade finance institutions, which pay the exporter on behalf of the buyer, if the terms specified in the LC are fulfilled. An LC requires an importer and an exporter, with an issuing bank and a confirming (or advising) bank respectively. The financiers and their creditworthiness are crucial for this type of trade finance: it is called credit enhancement – the issuing and confirming bank replace the guarantee of payment from the importer and exporter. In this section, and in most cases, we may consider the importer as the buyer and the exporter as the seller.
