The Complete Guide to Trade Finance

Trade finance encompasses financial products that facilitate international and domestic trade. It addresses the fundamental challenge that exporters want payment before shipping, while importers want goods before paying. Trade finance instruments provide security and working capital to bridge this gap. Products include letters of credit, documentary collections, trade loans, and supply chain finance.

A letter of credit (LC) is a bank guarantee that payment will be made to the exporter once specified conditions are met (typically presenting shipping documents). The importer's bank issues the LC, guaranteeing payment. The exporter's bank confirms receipt and releases funds on document presentation. LCs provide security for both parties in international transactions where trust and legal recourse may be limited.

Import finance provides working capital to purchase goods from overseas suppliers. Products include import loans to pay suppliers upfront with extended repayment terms, letters of credit providing payment guarantees to suppliers, documentary collections where banks manage document and payment exchange, and supply chain finance where funders pay suppliers early in exchange for fees.

Export finance helps Australian businesses sell overseas. Export Finance Australia (EFA) provides government-backed support including loans, bonds, and guarantees for exporters. Commercial banks offer export invoice finance (advancing against export receivables), export packing credit (funding production before shipment), and performance bonds for contract guarantees.

Trade finance is typically short-term (30-180 days) matching trade cycles. It is transaction-specific, secured against goods or receivables. Facilities may be self-liquidating as customer payment repays the advance. Interest and fees are based on transaction risk, not just borrower credit. Trade finance providers understand international commerce complexities including currencies, shipping, and customs.

Export Finance Australia (EFA) is the government's export credit agency, supporting Australian exporters since 1956. EFA provides loans and guarantees when commercial options are unavailable or insufficient. Products include export loans, bonds and guarantees, buyer finance, and project finance for overseas projects. EFA can support SME exporters often declined by commercial banks.

Trade finance suits businesses with international suppliers or customers, those with long payment terms creating working capital gaps, companies wanting to offer competitive terms to buyers, businesses needing security in unfamiliar markets, and those with growing trade volumes outpacing working capital. The cost of trade finance is typically lower than equity dilution or lost opportunities.