When you think about trade, you have to think about how goods and money will change hands. This can get complicated, especially when the parties involved have never worked together before. Let's say, for example, that an importer pays an exporter but the exporter never sends the goods. Or what if the exporter sends goods to an importer in good faith but the importer never pays?

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Protection is key in any trading deal in instances where there is one party who does not honor their commitment to either party not fully committing to the trade deal. There are scenarios where a particular crate could be damaged, of poor quality, or even subject to theft. To break this barrier, lenders can offer trade finance as an option with two key examples below:

 

1. Letters of Credit:  

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Banks can offer letters of credit as a form of guarantee. In instances such as this, the importer's bank will usually guarantee payment once a bill of lading is issued. A bill of lading is a document issued by a carrier to acknowledge receipt of cargo for shipment. A letter of credit is usually issued directly to the exporter's bank. 

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Once there is confirmation of goods and the quality inspection is sufficient according to the initial agreement, funds will be released by the importers' bank. In return, the exporter's bank will allow the goods to be released for the transaction to be complete. 

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2. Documentary Credit (Bill of Exchange)

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Documentary credit is an option for releasing payment that is similar to a credit letter. In this case, a lender will release payment when specific documents are submitted. 

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Assurance is needed to unlock capital and documents frequently required are shipping, purchase orders (POs), or insurance policies. There are often rigorous rules and regulations around documentation to make sure both parties are protected. 

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