7 Types of International Trade Finance You May Not Know About

Not much is known about international trade finance, simply because who takes out a loan from where is not something that is talked about around the water cooler or in the board room. What is known is that there are seven types of international trade finance programs – and you may not know about any of them.

Documentary Credit

Documentary credit, using letters of commercial confidence, is one-way exporters rely on trade finance. A bank issues a statement making a commitment to the exporter to pay a specific sum of money for the importer as long as the terms of the deal or sales contract are completed. The benefit of this type of credit use for the importer acts as an advancement that doesn’t tie up his or her money for a long-term deal that may take months. Rather, the document ensures payment will be made to the exporter on delivery of the goods or services. This type of deal relies heavily on the trustworthiness of the exporter and the creditworthiness of the importer.

Documentary Agreement

Another type of documentary credit includes the bill avalisation finance agreement, which allows the written guarantee from the buyer’s bank to stand as payment to the seller, just in case the buyer refuses to pay the agreed amount. In other words, the GBTI Bank would sign documents agreeing to make the payment if their customer refuses to pay for the goods that were delivered to them. This line of credit also includes custom bonds that permit payment of taxes after the products are sold and temporary transit bonds which allow goods that are going to be exported to waive the duties usually charged on the objects.

Countertrade Agreement

Countertrade agreements are offered when a country suffers from a shortage of liquid assets or reserves in foreign exchange. When this lack prevents a party from making an exchange of goods, the countertrade is issued. Using this agreement, a sort of barter takes place wherein both parties agree they will buy or sell the goods at an established value, but the trade never uses credit or cash. Instead, using the barter exchange agreement, the countertrade parties agree that the seller will buyback from the buyer, the equivalent of goods sold to the buyer. This type of barter sales agreement has proven especially valuable after countries break up or have a significant devaluation in their currency.

Forfaiting Guarantee

Forfaiting is another type of financial guarantee. Often, a financial firm will buy credit from an exporter in exchange for cash, minus an agreed-upon discount that pays for the service. Since the debt is completely transferred in exchange for the money, if the importer defaults, the seller is not liable; in other words, the exporter pays a service fee to transfer the default risk over to the debt buyer, the financial firm.

Insurance Agreement

Currency fluctuations and unstable prices are also a chief concern for the exporter and importer. Some documents act as insurance against those problems whether for domestic or international trade deals. Some of the many insurance programs are swaps, spot contracts, futures, options, and forward contracts. This type of agreement offers both the importer and exporter the ability to insure themselves against risks, including variations in prices, exchange rates, and monetary collapse. This agreement also prevents both parties from experiencing a loss because of these fluctuations.

Government Guarantee

Another type of trade finance is the government-backed or government-guaranteed documents, which can also be provided to ensure equitable trade deals occur between parties. This type of finance is often offered from specific departments or agencies within a government, rather than the head of state. The agency stands as a mediator or intermediary between the exporter or importer and the foreign government. The agency can offer help between parties when difficulties arise within the foreign government, such as political unrest, destabilization, riots, or unlawful seizures. Some people have described this type of help as a governmental insurance program without the agents, and it true to a large extent. The agency can help by providing insurance for terms ranging between six months and three years to help exporters that are in distress, as well as aid the exporters with credit for unforeseen transportation and production costs.

Bank Program

Some official banks have refinancing programs that offer a discount on commercial bills to exporters. Many provide these terms at preferential rates to draw the party in. This plan works almost the same way that forfeiting does because the bank takes on the debt if it is forfeit. Another type of banking program is the financial institutions that are financially focused on importer’s and exporter’s needs and deal almost exclusively with international trade and finance.

There is a lack of information about the relationship between trade finance and international trade; however, common sense states that one could not exist without the other. Understanding the impact of each and the ultimate evidence coming can lead to more information than has been found about either in many years.

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