What are the most common trade finance instruments used in international trade?

2 Bills of Exchange

A bill of exchange (B/E) is a written order from one party (the drawer) to another party (the drawee) to pay a certain sum of money to a third party (the payee) at a specified date or on demand. The B/E is commonly used in international trade as a means of payment, credit, or guarantee. The exporter can draw a B/E on the importer and present it to a bank for discounting, which means receiving the cash value of the B/E before its maturity date. The bank can then collect the payment from the importer at the due date or sell the B/E to another bank or investor.

3 Documentary Collections

A documentary collection (D/C) is a method of payment in which the exporter entrusts the collection of the payment to a bank, which sends the documents related to the shipment of the goods or services to the importer's bank, with instructions to release them to the importer only after the payment or the acceptance of a B/E. The D/C is less costly and less secure than an LC, as the banks do not guarantee the payment, but only act as intermediaries. The D/C can be either sight or term, depending on whether the payment is due upon the presentation of the documents or at a later date.

4 Trade Credit

Trade credit is a form of financing in which the exporter allows the importer to defer the payment for the goods or services until a certain period after the delivery or the invoice date. Trade credit is usually granted by the exporter based on the creditworthiness and the relationship with the importer, and it does not involve any banks or financial institutions. Trade credit can help the importer to improve its cash flow and reduce its financing costs, but it also exposes the exporter to the risk of late payment or default.

5 Factoring and Forfaiting

Factoring and forfaiting are two types of trade finance that involve the sale of receivables or B/Es to a third party, called a factor or a forfaiter, who assumes the risk of non-payment and provides cash advance to the exporter. Factoring is usually applied to short-term receivables, while forfaiting is used for medium- to long-term B/Es. Factoring and forfaiting can help the exporter to improve its liquidity and mitigate the credit risk, but they also entail fees and discounts that reduce the profit margin.

6 Here’s what else to consider

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