The Treasurer’s Guide to Trade Finance

A Reference Guide to Trade Finance Techniques

Nature of financing Availability Suitability

Overdraft

Allows a company to run its

current or checking account

with a debit balance.

However, may be repayable

on demand.

Available in most

locations, although they

are prohibited in some

jurisdictions.

Relatively flexible and usually

available (where permitted) to

companies of all sizes. Easy

to establish and operate.

Bank line of credit

Offers more secure

financing than an overdraft.

Can be in the form of either

a term loan or a revolving

facility.

Available in every

location.

Widely available and can be

used for a variety of activities.

Critical for treasurers to

negotiate appropriate terms

and conditions with lender.

Negotiable
trade document

Allows the holder of a trade

document, such as a bill

of exchange, to arrange

finance by discounting it with

a third party.

Usually easy to

arrange, although

dependent on market

conditions and the

credit status of the

document’s acceptor.

Allows holder of document

to accelerate cash flow, so

is a useful source of working

capital finance. However, it

can be an expensive source

of short-term finance.

Factoring

Allows a company to raise

finance against invoiced

receivables. Invoices are

sold to a factor, which then

collects invoiced receivables

from the company’s

customers.

Available in most

locations under a longer-

term arrangement.

Requires company to

disclose the arrangement

to customers, as factor

will collect receivables.

Most suited to small and

medium-sized companies

where the company has a

relatively large number of

customers all trading on the

same terms.

Invoice discounting

Similar to factoring, in that

the company raises finance

against invoiced receivables.

However, the company

retains responsibility for

collecting receivables from

its customers.

As with factoring,

available in most

locations. Will require

the company to

open its accounts

receivable process to

the invoice discounter

before funding can be

arranged.

Suitable for companies with

a relatively large number of

customers all trading on the

same terms (as factoring), but

which want to retain control

over their sales ledger.

Supply chain finance

A technique which allows

companies to facilitate the

provision of credit to their

suppliers. It allows stronger

credits to leverage their own

credit status so that finance

can be provided to suppliers

at lower rates than they can

usually access themselves.

For a supply chain

finance structure to

work, one entity in

a particular supply

chain must have a

significantly stronger

credit status than most

of its suppliers.

For a programme to be

successful, there must

be an established trading

relationship between both

parties, who must each feel

confident that the structure is

in their mutual interest, both in

the short and longer terms.

Forfaiting

A similar technique to invoice

discounting, although the

finance is usually arranged

on presentation of a debt

instrument, rather than an

invoice.

Only available against

a transferable debt

instrument.

Usually arranged against

receivables over a period of

two or more years, although

shorter terms can be possible.