Trade finance: a complete guide

The problem trade finance solves

International trade has a timing problem at its heart. A supplier — often on the other side of the world — wants paying at or before shipment. Your buyer wants to receive, inspect and sell the goods before parting with cash. In between sits weeks of shipping and a working-capital hole the size of the order. Trade finance fills that hole, paying the supplier when they need it and letting you settle once you have been paid.

It also manages risk. When buyer and seller have never met and sit in different legal systems, neither wants to move first. Trade-finance instruments insert a trusted third party — usually a bank — so each side performs against documents rather than trust. That is what makes cross-border deals bankable.

Letters of credit

A letter of credit (LC) is the classic instrument. Your bank promises to pay the supplier a set amount, provided they present documents proving they shipped exactly what was agreed — the bill of lading, commercial invoice, packing list and any certificates the contract demands. The supplier ships knowing payment is guaranteed by a bank, not just by you; you know payment is released only once the paperwork proves performance.

The mechanism is entirely documentary: banks deal in documents, not goods. If the papers match the LC's terms, payment flows; if they do not, the supplier must fix the discrepancy first. That precision protects both sides but demands accuracy — a mismatched document can hold up funds, so getting the terms and paperwork right at the outset matters.

Import finance and export finance

Around the LC sit funding lines that put up the actual cash:

• Import finance pays your overseas supplier on your behalf and gives you a payment window — often 30 to 120 days — to sell the goods and settle. It funds the leg from supplier payment to your own sale.
• Export finance works the other way: when you ship to an overseas buyer on credit terms, it advances cash against that receivable so you are not waiting on a foreign debtor. In practice it overlaps with invoice finance applied to export sales.

Many importer-exporters combine the two into a revolving trade line that funds the whole cycle — paying suppliers, financing goods in transit and bridging buyer credit terms — rather than arranging each shipment separately.

What it costs and where it fits

Pricing usually blends an LC issuance or confirmation fee, charged as a percentage of the value, with interest on any funding drawn for as long as it is outstanding. Because the instruments are documentary and often bank-issued, expect set-up administration and tight document requirements — the trade-off for unlocking deals that would otherwise be too risky to do.

Trade finance is specialist and best suited to genuine cross-border movement of goods. If your need is simpler — a domestic stock build, a confirmed order to fulfil, or a working-capital gap — a flexible facility is usually quicker and lighter to run. See purchase order finance for funding a confirmed order, or working capital finance for general gaps. Credicorp lends to limited companies with no personal guarantee; register to apply. This guide is educational, not financial advice.