The Treasurer’s Guide to Trade Finance

Chapter 7 Trade financing techniques

Nature of financing Availability Suitability

Commodity financing

Often used where the

underlying goods are raw

materials, sometimes

perishable, easily moved and

saleable in their current state

(rather than as a finished

product), tradable and where

a terminal market exists to

hedge price risk.

The nature of the

commodity being

financed usually

determines whether the

financier wants to take

control of the commodity

itself as security for

the finance and also

what sort of financing is

required.

A useful technique which

significantly reduces credit

risk between a commodity’s

producer, a trader and the

ultimate buyer.

Leasing

A technique allowing a

company to have access

to a particular asset without

necessarily having to hold the

full value of the asset on the

company’s balance sheet.

Leases are commonly

available in almost all

locations.

An attractive technique for

companies seeking to ensure

the use of a particular asset

for a set period of time.

Project finance

Usually arranged to finance

large-scale construction and

manufacturing projects, via

a separate entity which is

established to manage and

fund the project.

A variety of different

techniques are

available to provide

project finance to reflect

the requirements of the

various participants.

Best suited where a discrete

project can be identified

and where a number of

different companies will

be participating in the

construction process.

Structured trade finance

This refers to many different

techniques offered by banks

and other providers to

support a supply chain. These

techniques can be used to

support both domestic and

international trade. Common

forms include: pre-export

(pre- and post-shipment)

finance, warehouse finance,

prepayment finance, and

limited recourse financing.

There is no standard

technique for structured

trade finance.

Availability depends

on the nature of the

entities in a particular

supply chain and

the relationships the

company is seeking to

support.

Solutions can be tailored

to meet almost any set of

circumstances.

Trade-related

escrow

An escrow account is

used when a buyer and

a seller both want to

protect themselves against

counterparty risk.

Availability is dependent

on both parties agreeing

to use the same bank (or

other provider) to provide

the escrow account.

Best suited where the two

parties are unknown to each

other.

Export credit

schemes

These provide a range

of support for companies

seeking to expand their

export sales.

Most countries operate

some form of export

credit scheme. The

scope of the different

schemes varies from

country to country.

Suitability will vary according to

the terms of the scheme offered

in the relevant country. In most

cases, a scheme will provide

support to smaller companies

seeking to expand its exports

and project finance for larger

companies engaged in foreign

infrastructure projects.