A trade finance facility is usually a lending line, letter of credit facility, standby letter of credit facility or similar trade facility.

Typically trade finance is a purchase order type of financing facility and this is used mostly by international traders, but can also apply domestically. It will be appropriate when companies want to purchase or sell goods and services. Trade finance lenders may come in the form of banks, alternative lenders or investment funds. Trade finance companies will fund many types of different underlying products; these may vary from commodities, toys or machinery to food stuffs. Trade finance can be structured in many different ways and flow into differing companies at various points. All have the aim of providing finance to increase the trade of a company.

The facilities of trade finance companies will be structured in various different ways; a few examples of these are:

• Uncommitted trade finance lines – they flow into a company and allow a financial institution to decide whether they will fund each individual trade
• Tripartite agreement – this is when the buyer, funder and supplier have signed up to a trade finance agreement to agree on the trade cycle and how repayments are made
• Trade finance all secured lend
• Revolving credit facility
• Trade and invoice discounting hybrid line

A trade finance company aims to have full clarity and oversight on the trading cycle; so that they can understand who the supplier and end buyer is along with the underlying products that are traded. There are many trade finance entities that will only work with specific products and not work with companies buying and selling unfinished goods. Another widely seen requirement is that lenders will not take performance risk on purchases and sales.

How do trade cycles work?

Many trade finance businesses will complete a cycle with an invoice finance line, which will pay down a trade finance facility. The reason for this is that a lender will require a full view of the trade cycle and require security that the facility will be paid back by the end buyer. This is why an invoice finance facility is sometimes used to pay back funders against the invoices that are submitted to end buyers; relating to the initial trade purchase.

Trade finance facilities can be structured in a number of ways and they allow companies to expand in new and entrepreneurial directions.

What are the main types of trade finance used?

The most typical facilities for which trade finance companies provide: