Trade Finance Guide

Types of Trade Finance

If you are new to the subject, start with what is trade finance. For how each tool works in detail, see trade finance instruments explained. This page is the map; that page is the mechanics.

Payment instruments (LCs, collections, open account support)

Payment instruments decide how and when money moves from buyer to seller, and how much protection each side has.

• Letters of credit (LCs). The buyer's bank undertakes to pay the seller when compliant documents are presented. LCs can pay at sight or at a later date. Importers can read letters of credit for importers, and sellers can read our export letter of credit guide. Payment timing is covered in sight letter of credit and the usance letter of credit guide.
• Transferable LCs. Intermediaries can pass part of an LC to their own supplier. See transferable letter of credit.
• Documentary collections. Banks exchange documents for payment or acceptance but give no payment guarantee. Cheaper than an LC, with more risk for the seller.
• Open account support. The seller ships on credit terms, supported by credit insurance, receivables finance or a buyer-led programme.

Cost matters when choosing. See letter of credit fees explained for the usual fee lines.

Risk mitigation (confirmations, guarantees, SBLCs)

These products move risk to a stronger party. They often do not involve lending money at all.

• LC confirmation. A second bank adds its own payment undertaking, removing issuing bank and country risk for the seller. See confirmed letter of credit.
• Demand guarantees. Performance bonds, advance payment guarantees, bid bonds and payment guarantees pay on a compliant demand.
• Standby letters of credit. An LC used as a backstop, drawn only on default. See our standby letter of credit page.
• Credit and political risk insurance. Insurers cover buyer default or events such as transfer restrictions.

Working capital and receivables finance

Once a sale is made, the seller holds a payment claim. These products turn that claim into cash, or extend the buyer's time to pay.

• Import trade loans. A bank pays the supplier for the importer and is repaid from the importer's resale proceeds. See import trade loan.
• LC discounting. A bank pays the seller early against an accepted deferred payment under an LC.
• Forfaiting. A financier buys medium-term receivables, often bills or promissory notes, without recourse to the seller.
• Invoice discounting and factoring. A financier advances a share of invoice value and is repaid when the buyer pays.
• Supply chain finance. A large buyer approves invoices and a bank pays suppliers early on the buyer's credit. See trade finance vs supply chain finance and how supply chain finance works.
• Distributor finance. A bank funds a manufacturer's distributors with support from the manufacturer. See distributor finance.

Inventory, borrowing base, and pre-export finance

These products fund goods before they are sold, or before they are even produced.

• Warehouse receipt finance. A lender takes security over goods in a licensed warehouse, evidenced by a receipt.
• Collateral management. An independent manager monitors stock and releases goods only on the lender's instruction.
• Borrowing base facilities. A revolving line sized against eligible inventory and receivables, recalculated regularly with haircuts.
• Repo structures. A financier buys inventory and agrees to sell it back later.
• Pre-export finance (PXF). A lender advances funds to a producer and is repaid from export sales under offtake contracts. See pre-export finance for commodity producers.
• Prepayment finance. A buyer, often funded by a bank, pays a producer in advance and recovers the amount through deliveries.

Structured and commodity trade finance

When a transaction combines several of these types with tight control of goods, documents and cash, it becomes structured trade finance. A typical structure might pair a prepayment with an offtake contract, an assignment of proceeds, a collection account and collateral management. Most such structures are self-liquidating, meaning the trade proceeds repay the facility.

Commodity flows are the main users of these structures because metals, energy and agricultural goods are standard, priced daily and can be sold if a party fails. Read what is commodity trade finance for the basics, or see our commodity trade finance service page.

How to choose a type for your deal

Work through these questions before approaching a financier:

• Timing. Do you need cash before shipment, after shipment, or while goods sit in storage?
• Credit. Whose credit is strongest: yours, your buyer's or your bank's? Buyer-led programmes need a strong buyer; LC discounting needs a strong issuing bank.
• Control. Who holds the goods and the title documents at each stage?
• Cycle. Is this one shipment or a repeating flow that suits a revolving line?
• Jurisdictions. Do country or bank risks call for confirmation or insurance?
• Cost. Does the protection justify the fees compared with simpler terms?

Most real deals combine two or three types. An importer might use an LC to secure the supplier and an import loan to pay at sight, then repay from resale.

Frequently asked questions

What are the main types of trade finance?

Payment instruments, risk mitigation products, working capital and receivables finance, inventory and pre-export finance, and structured or commodity trade finance that combines them.

What is the difference between a type and an instrument?

A type is a category defined by the problem it solves, such as pre-shipment funding. An instrument is the specific tool used, such as a letter of credit, a guarantee or a bill of exchange.

Which type of trade finance is cheapest?

It depends on the deal. Collections and open account are usually cheaper than LCs but give less protection. Cost tends to follow risk.

Can one deal use several types?

Yes. Many deals combine a payment instrument, a funding product and a risk mitigation product.

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