6 Types Of Trade Finance That Enable Global Trade

Containers move because somebody takes payment risk. Importers want credit terms, exporters want cash, and banks sit in the middle to bridge that gap. Trade finance is the toolkit that turns a purchase order in one country into cleared funds in another, while managing delivery risk, credit risk, and compliance along the way.

Overview Of The Main Trade Finance Tools

1. Documentary Letters Of Credit

Documentary letters of credit are still the reference product for cross-border trade. The issuing bank acts on behalf of the importer and undertakes to pay the exporter if the exporter presents documents that comply with the letter of credit terms and with UCP600 rules. The bank does not inspect the physical goods; it checks documents such as bills of lading, invoices, packing lists, and inspection certificates.

For the exporter, a confirmed letter of credit shifts payment risk from the importer to the confirming bank. For the importer, the structure ensures that payment only happens against documents that prove shipment. This balance is why letters of credit remain central in markets where counterparties do not fully trust each other or where legal enforcement is slow.

2. Standby Letters Of Credit And Bank Guarantees

Standby letters of credit and bank guarantees support obligations instead of routine payments. Under ISP98 or similar rules, a standby letter of credit is drawn only if the applicant fails to perform or pay. Typical uses include performance support under EPC contracts, advance payment guarantees, warranty obligations, bid bonds, and rental or lease undertakings.

From the beneficiary’s point of view, a standby or guarantee is a safety net. If the counterparty fails, the bank pays on a complying demand. From the applicant’s side, these instruments free up working capital since the bank’s undertaking can replace cash collateral or large retainers that would otherwise sit on the balance sheet.

3. Documentary Collections

Documentary collections sit between open account trade and letters of credit. Under URC522 rules, the exporter presents shipping documents to its bank with instructions to release them to the importer’s bank against payment or acceptance of a bill of exchange. Banks handle the documents and cash flow, but they do not give an independent payment undertaking in the same way as a letter of credit.

Exporters use collections where they know the buyer reasonably well but still want control over the documents of title. Importers like collections because bank charges are usually lower than full letters of credit and the process is simpler. The trade-off is that payment risk sits mainly on the buyer, not on the banks.

4. Trade Loans And Import/Export Finance

Trade loans provide short-term funding for a specific trade cycle. An importer may borrow to pay a supplier at shipment, then repay the bank once the goods are sold. An exporter may draw a pre-shipment or post-shipment loan while goods are manufactured, shipped, and delivered. Interest is charged for the period the loan is outstanding and the facility is usually self-liquidating from trade proceeds.

These loans can be secured against goods, receivables, letters of credit, or a broader borrowing base. When structured properly, they give companies enough liquidity to accept larger orders or longer payment terms without straining their own balance sheet.

5. Receivables Finance And Factoring

Receivables finance converts trade invoices into near-cash. In a classic factoring arrangement, a financier purchases receivables at a discount and takes over collection, with or without recourse to the seller. Exporters can also use forfaiting or structured receivables purchases for medium-term obligations backed by stronger obligors or bank guarantees.

The benefit is simple: faster cash conversion and better visibility on working capital. The trade-off is the cost of discounting and, in some cases, concentration limits and eligibility rules. For growing exporters that sell into reliable buyer bases, receivables finance is often more scalable than relying only on unsecured overdrafts.

6. Supply Chain Finance And Payables Finance

Supply chain finance and payables finance programs start from the buyer’s credit profile. A large buyer agrees invoice approval procedures with its bank or platform provider. Once an invoice is approved, the supplier can elect to receive early payment from the financier at a discount, while the buyer pays on the original due date or even extended terms.

This structure can stabilise supplier cash flow and support longer tenors across the supply chain. For the buyer, it protects procurement and production while preserving liquidity. For banks and investors, it creates exposures to the stronger buyer rather than to dozens of smaller suppliers.

Putting The Right Trade Finance Mix In Place

The right structure depends on who you are, who you trade with, and how your contracts are written. A high-risk counterparty in a fragile jurisdiction may require confirmed letters of credit and standbys. A stable long-term relationship with a large buyer may benefit more from supply chain finance and receivables purchases. Many exporters end up using a combination of these tools as their trade volumes and counterparties evolve.

Our work is to map your trade flows, counterparties, and balance sheet, then design a bankable structure that supports larger volumes and longer terms without losing sight of compliance and capital cost.

We act as arranger and advisor through regulated partners. We are not a bank and we do not hold client funds. All services are subject to KYC, AML, and sanctions screening. Structures and examples in this article are for general information only and must be tailored to specific transactions, jurisdictions, and counterparties.