October 20, 2020
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What is Trade Finance?

In this post, I am going to write about the Trade finance domain. This will get you started with the basics and key products of trade finance.

Trade Finance is all about Finance for Trade deals that occur between the Importer and exporter. Trade Finance facilitates the purchasing power of Importers and mitigates risk for Exporters. It acts as a backbone for buyers and sellers, whether its Local or International market.


The Trade Finance providers are Finance houses, Banks, Suppliers, Buyers, Syndicates, Non-Banking Finance Co-operation {NBFC}, etc. Amongst all these, the Banks play a pivotal role by providing finance to buyers and sellers. They offer various products and services that support buyers in getting their products and services delivered and sellers to get paid for their products/services. As stated above, The Banks offers numerous financing facilities to Importer and Exporters.

Key Trade finance documents and products

Some of the key document and products used in trade finance are as follows:

  • Letter of Credit [LC]
  • Bank Guarantees [BG],
  • Post shipment[PSFC] and Pre-shipment [PCFC],
  • Discounting of Bills,
  • Overdraft Facilities,
  • Term Loan,
  • Working capital Loans,
  • Buyers and Suppliers Credit, and
  • Supply Chain Finance.
Trade Finance Products

The Brief description of some of the Key finance products are discussed in the next few sections.

Letter of Credit [LC]

It’s a commitment provided by Bank based on specific terms and conditions in the form of a Letter agreed upon between Bank, Buyer, and Seller. It is the most widely used funding tool that promises to pay the specified amount on a specific due date to the seller on behalf of the buyer. There are multiple types of LCs. The types of LCs are listed below:

  • Revocable or Irrevocable LC,
  • Transferrable or Non-Transferrable LC,
  • Red or Green clause LC’s,
  • Confirmed or Un-Confirmed LC’s,
  • Revolving and Non-Revolving LC’s,
  • Sight or Usance and
  • Back to Back LCs.

Bank Guarantee [BG]

As a name suggests, this product is all about a Bank agrees to guarantee payment to the relevant party in case of breach of contract. It is a contractual obligation among three parties, i.e. Bank, Applicant, and the Beneficiary.

LC and BGs are not the same. In LC payment is made on the basis of the delivery of goods and services, whereas in BG’s payments are made if the obligation is failed by any of the parties.

BGs exist in various forms such as Financial, Performance, Bid Bond, Shipping Guarantees, Custom, etc.

Buyers and Supplier Credits

It is a Loan facility in the foreign currency taken for a short period for making payment to the overseas seller for imports of goods and services. The Buyers credit arranged by Importers through overseas Banks, whereas supplier credits are extended credits by overseas suppliers. This funding methodology is only used in International Trade.

Supply Chains Finance

It is a commonly used financing technique by Banks in the Local market i.e., within the country. It is financing with or without recourse to vendors or dealer’s in advance on the basis of the Bill of Exchange i.e., Hundi and Invoices. The types of supply chain financing are:

  • Channel financing,
  • Vendor Financing,
  • Sales or Purchase Invoice discounting,
  • Bills discounting, etc.

Pre-Shipment and Post shipment

Pre-Shipment facility, also known as Packing Credit in foreign currency [PCFC] it’s a loan provided to exporters for manufacturing, procuring materials, packing of goods, etc. i.e., in order to export of goods outside the country whereas Post shipment facilities are short term loan given to exporters against goods that have already shipped payments, however, are awaited from importers thereby to manage day to day working capital and cash liquidity crunch.

Other Loans/Products

 It is provided into various forms such as Cash Credit facility / Overdraft facility / Working capital and Term Loans. These help buyers and seller manage their daily cash activities and working capital requirements. These loans are provided on the basis of fixed, floating, Mibor, Libor, BPLR, PLR, and MCLR, etc. interest rates prevailing in the market and payment scheduled through interest and Principal plus down payment forms.

About Techcanvass

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Abhishek Srivastava

Abhishek Srivastava is a seasoned IT professional with diverse experience in Banking, Insurance, Utility and Education domains. Managing large accounts, Program management & Developing business solutions has been his forte.An NIT / IIM Kozhikode graduate, He founded Techcanvass (https://techcanvass.com) in 2013. With Techcanvass, He is pursuing his dream of creating an organization imparting quality education to IT professionals. He believes that learning is a lifelong journey and one must never stop learning.He also loves writing and sharing his knowledge. Some of his notable books are ERP to E2RP, UML Modelling for Business Analysts, Business Analysts Practitioners Guide, Software Testing: A practical Approach. All these books are available on Amazon.

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