Trade finance is an instrumental mechanism of global trade, through which exporters are paid or guaranteed payment for their goods before shipping them to the importer. In turn, importers require assurance of the receipt of goods after payment.
After importers issue a trade finance payment instrument to the exporter, exporters only receive funds after furnishing transport documents such as Bills Of Lading (BOL) to verify that the goods paid for have been shipped to the importer.
Products offered by banks to provide trade financing include Letters of Credit (LCs), a guarantee of payment after goods have been shipped, and trust receipts (TRs), a financing method through which a bank allows the im- porter to take physical possession of goods — typically imported with same bank’s LC — but the ownership title to the merchandise still rests with the bank.
The process of trade finance benefits importers and exporters alike, mitigating cross-border trade risks via globally-accepted forms of trade payment, such as LCs.
Banks have different trade terms designated for various parts of the trade cycle, from pre-export and post-export finance to inventory and receivable finance, following the trade supply chain from start to finish.
On the bank’s part, financing is usually short-term, mapping the trip cycle of exports and involves multiple parties in the process, such as buyers and sellers, storage operators and cargo inspectors. Keeping tabs on transactions requires a full spectrum of meticulously tracking shipping vessels, sales and the receipt of proceeds.
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To facilitate the financing of underlying cargo, trade document visibility serves as crucial evidence of the physical goods being exported. OCBC, for example, does not finance paper trade and is involved only to the extent that paper is a hedge for physical trade.
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Depending on the size of the customer, trade finance can be conducted at differing risk profiles. Banks may offer larger customers looser terms and await payment at the end of the designated maturity period, whereas for small- to medium-sized customers, banks require greater assurance of repayment.
The paper-based nature of trade finance makes the process of physically verifying various documents a laborious task — and prone to invoice fraud. The digitisation of trade finance would reduce man hours and human error while simplifying the process of document verification.
