What is Trade Finance?

In this post, we are 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 markets.

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 offer numerous financing facilities to importers and Exporters.

Key Trade finance documents and products

Some of the key documents 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

A brief description of some of the Key finance products is discussed in the next few sections.

Letter of Credit [LC]

It’s a commitment provided by the Bank based on specific terms and conditions in the form of a Letter agreed upon between the 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 LCs, 
  • Confirmed or Un-Confirmed LCs, 
  • Revolving and Non-Revolving LCs, 
  • Sight or Usance and 
  • Back to Back LCs.

Bank Guarantee [BG]

As the name suggests, this product is all about a Bank agreeing 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, Customs, etc.

Buyers and Supplier Credits

It is a Loan facility in foreign currency taken for a short period for making payment to the overseas seller for imports of goods and services. The buyer’s credit is 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 dealers 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] is a loan provided to exporters for manufacturing, procuring materials, packing of goods, etc. i.e., in order to export 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 in 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.


In conclusion, trade finance is essential to international trade since it enables the movement of commodities and services across national boundaries. A thorough understanding of trade finance is becoming increasingly important as companies broaden their presence on the international market. Understanding the nuances of trade finance can be a game-changer whether you’re an experienced professional or are just starting out in the realm of international trade.

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