The Treasurer’s Guide to Trade Finance

Chapter 7 Trade financing techniques

Introduction

There are many different techniques that
a company can use to finance trade.
These generally fall into either of two main
approaches.
One approach is to finance trade from the
company’s general working capital facility.
For example, an overdraft or general bank
line of credit will support any working capital
requirement that arises, including the time
between the payment to a supplier and
collection of payment from its customer.

Working capital

The alternative is to finance each

transaction separately. For example, a

company could choose to discount the

invoices, or negotiate the trade documents

associated with each distinct transaction.

As with any financing decision, there

are advantages and disadvantages to each

technique. Some techniques will not be

available to some companies, depending

on their location, creditworthiness or size.

Selecting one technique to finance some trade

transactions may have other implications

for the business as a whole. For example,

discounting liquid invoices may result in

cheaper financing of a particular transaction,

but may prompt a bank to require additional

security on assets protecting another line of

credit. Similarly, using general working capital

facilities to finance trade may reduce the

company’s liquidity metrics, and push it close

to breaching covenants on other loans.

There is no single right way to finance

trade. Each company will usually have a

variety of options (although circumstance

may make only a small number of these

realistic). It is, though, important to consider

financing options in the context of their

potential impact on the company’s overall

cost of funds.

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