Simply put, trade finance is the financing of international and domestic trade, covering all types of bank and non-bank funding which facilitates trade of goods and services.
The large majority of trade transactions are done on open account terms, that is, the supplier requests payment from the buyer once the goods have been sent. However, traditional trade cannot safely take place without some form of trade financing – which includes traditional mechanisms like Documentary Letters of Credit and fast-growing techniques and structures in Supply Chain Finance, together with some form of risk mitigation, which can be provided through private sector sources, export credit agencies or multilateral development banks, among other sources.
Trade Finance includes:
- Documentary Letters of Credit
- Open Accounts based trade
- Bank Guarantees
- Documentary Credits
- Trade Insurance
- Invoice Finance
International trade is growing, and trade flows are predicted to grow 4.3% to reach nearly USD 19 trillion by 2020 according to Boston Consulting Group. That said, trade finance has had significant challenges around increasing compliance and KYC costs, slowing trade, and challenges within Asia-Pacific to finance trade, particularly amongst SMEs.
One big opportunity for trade finance has been around the digitalisation of paper based Letters of Credit, and simplifying supply chain finance through the blockchain.
How does trade finance work?
Trade finance helps safely facilitate the financing of trade between a buyer and seller. A seller of goods and services might not trust the buyer, or require a financial payment guarantee before taking on big orders.
A trade financier, often a bank, will offer a financial guarantee to the seller (or seller’s bank) in which it will guarantee payment on pre-agreed terms (e.g. the goods will be delivered to a shipping port as agreed, and the goods will be as per an agreed description or quality).
A Letter of Credit is normally issued between the buyer and seller, to guarantee payment once goods are shipped.
What are the big trade opportunities for 2018?
We spoke to Trade Finance Global about the top 2018 trade trends, which include the recovery and return to growth of global trade, the digitisation of trade finance across the board, including Letters of Credit and Shipping / Freight Forwarding, as well as a shake up of trade agreements in light of political changes.
To find out more about trade finance, see Trade Finance Global’s trade finance hub.