By Bill Camarda
Traditionally, large commercial banks have been the world’s largest providers of trade financing, and relatively few institutions accounted for a disproportionate amount.2 Typically, an importer’s commercial bank provides a letter of credit to the exporter or its bank, guaranteeing payment once a bill of lading or other appropriate documents have been presented. Conversely, an exporter’s commercial bank might loan money to the exporter based on an export contract.3
Global commercial banks remain a leading source of trade finance. But in the wake of regulatory changes, some banks have refocused their trade finance business on large clients, which brings lower compliance risk and creates more opportunities to market unrelated offerings to these large customers.4,5
This especially affects small and midsize enterprises (SMEs). While the impact hasn’t been felt evenly in all regions, it has made financing more challenging for many companies seeking to expand their international presence. In a 2019 survey, BNY Mellon reported that 32 percent of banks surveyed saw their own institutions rejecting more applications for trade finance, and 52 percent noticed more rejections by other banks.6
Within Europe, global banks’ retrenchment created opportunity for some local banks that want to add international services, according to Greenwich Associates. “Although margins are thin and competition is fierce, trade finance still represents the quickest and cheapest way for banks to add an international element to their franchise,” the research firm wrote.7 The U.K.’s Pinnacle Trade Finance Limited also sees more opportunities for regional banks to serve business trade finance requirements around the world, leveraging such advantages as “a more in-depth understanding of local markets and greater acceptability to important local clients… [and] customized care and support.”8
As Shipping and Freight Resource notes, banks often expect property as collateral against their trade financing, limiting their customers’ ability to free up finance while facing lengthy international payment cycles. Since they often evaluate requests for trade finance on metrics similar to other commercial loans, the risks can seem high, leading to rejections or higher interest rates.9 In such cases, customers might wish to pursue non-bank trade finance options.
Some of these emerging firms focus exclusively on trade financing, leveraging innovative technology and building new industry platforms and digital trade finance networks based on diverse funding sources, such as private investors, investment firms, and crowdfunding. This business model assumes that these trade finance specialists will be able to help investors judge risk, and the varying risk tolerance of diverse investors will allow for wider access to trade credit, more customized repayment terms, and more flexible collateral—for example, receivables or purchase orders.10
Yet another source for trade finance could be an Export Credit Agency (ECA): a government-backed institution designed to help domestic companies export successfully. ECAs can lend directly to the seller, lend to a bank or another lender (who, in turn, will loan the proceeds to the seller), or compensate a commercial lender for subsidizing a loan at lower-than-market rates.11
The U.S. ECA is the Export-Import Bank of the United States (EXIM), which lends primarily through commercial lenders, supporting transactions that private lenders won’t support on their own.12 The Canadian equivalent is Export Development Canada, which served some 7,400 Canadian companies in 2017.13
Rather than pursuing traditional trade financing mechanisms such as letters of credit, more companies are now utilizing supply chain financing, sometimes called reverse factoring. While this can take multiple forms, suppliers typically sell their receivables to a financial firm (a “factor”). The supplier is paid quickly, which can improve working cash flow. The company that purchased the goods might get more time to pay, optimizing their own working capital. What they owe is treated as accounts payable, not as financial debt.
The money to fund the transaction can come from a variety of sources: a bank or other financial institutions, capital market, or—in part or whole—even the buyer.14 If the seller is an SME and its customer is a large, well-established firm, the transaction can also benefit from the customer’s lower cost of capital.15 (Learn more about supply chain finance.)
Some large commercial banks have deemphasized trade finance, presenting challenges for SMEs seeking to expand their international presence. Fortunately, alternatives exist, ranging from smaller regional banks, non-bank lenders, and government-funded agencies to supply chain finance specialists.
Bill Camarda is a professional writer with more than 30 years’ experience focusing on business and technology. He is author or co-author of 19 books on information technology and has written for clients including American Express Private Bank, Ernst & Young, Financial Times Knowledge and IBM.
1. “Trade Finance,” World Trade Organization; https://www.wto.org/english/thewto_e/coher_e/tr_finance_e.htm
2. “2017: Rethinking Trade & Finance,” International Chamber of Commerce; https://cdn.iccwbo.org/content/uploads/sites/3/2017/06/2017-rethinking-trade-finance.pdf
3. “What is Trade Finance?” Trade Finance Analytics/IJ Global; https://tradefinanceanalytics.com/what-is-trade-finance
4. “Trade Finance: An Expanding Opportunity for Institutional Investors,” Cambridge Associates; https://www.cambridgeassociates.com/research/trade-finance-an-expanding-opportunity-for-institutional-investors/
5. “The Alternative Represented by Trade Finance Funds,” Redbridge; https://www.redbridgedta.com/market-intelligence/the-alternative-represented-by-trade-finance-funds/
6. “2019 Global Survey: Overcoming the Trade Finance Gap,” BNY Mellon; https://www.bnymellon.com/_global-assets/pdf/our-thinking/2019-global-survey.pdf
7. “Trade Finance: A Market Eager for Disruption,” Greenwich Associates; https://www.greenwich.com/corporate-banking/trade-finance-market-eager-disruption
8. “$1 Trillion In Trade Finance Opportunities For Regional Banks,” Global Finance; https://www.gfmag.com/topics/blogs/1-trillion-opportunities-regional-banks-trade-finance
9. “Trade Finance Providers and Their Role in the Industry,” Shipping and Freight Resource; https://shippingandfreightresource.com/trade-finance-providers-and-their-role-in-the-industry/
11. “Export Credit Agencies,” Trade Finance Global; https://www.tradefinanceglobal.com/export-finance/export-credit-agencies-eca/
12. “Export-Import Bank of the United States (Ex-Im Bank) | Export Credit Agency (ECA) in USA,” Trade Finance Global; https://www.tradefinanceglobal.com/export-finance/export-credit-agencies-eca/ex-im-bank-usa-eca/
13. “Export Development Canada (EDC) | Export Credit Agency (ECA) in Canada,” Trade Finance Global; https://www.tradefinanceglobal.com/export-finance/export-credit-agencies-eca/edc-canada-eca/
14. “What is Supply Chain Finance?” PrimeRevenue; https://primerevenue.com/what-is-supply-chain-finance/
15. “Supply Chain Finance,” Investopedia; https://www.investopedia.com/terms/s/supply-chain-finance.asp