Methods of payment in international trade finance

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If your business is considering using trade finance, it’s useful to understand the different methods available, and the risks involved. In this guide, we’ll explore the four main types, and help you decide what’s right for your business.

Cash advance

As the name suggests, cash advance requires payment from the buyer (importer) to the seller (exporter) before the product has been shipped. That makes it a popular choice for many businesses because they gain upfront working capital to make and ship the goods — plus their exposure to risk is significantly reduced. However, things can become problematic if the delivered goods aren’t up to standard, or arrive late.

Letters of credit (LCs)

Also known as documentary credits (DCs), LCs are financial and legally-binding instruments that help ensure a seller will be paid on behalf of the buyer — as long as the terms specified in the LC are fulfilled.

One of the advantages of LCs is they can meet a variety of needs that benefit both the buyer and seller. For this reason, it’s worth knowing about the different types available and the terms used. Find out more in this quick guide from Trade Finance Global.

Documentary collections (DCs)

With a DC, the seller requests payment by presenting its shipping and collection documents to their remitting bank — which then forwards them to the buyer’s bank for payment. DCs tend to be more cost-effective and convenient than letters of credit, and are ideal if the importer is based in a politically and economically stable market.

Open account

With open account transactions, the buyer typically pays the seller 30-90 days after the goods arrive. While that’s advantageous for the buyer, there are however substantial risks for the seller — so this payment method may only be preferable if both parties have a strong and trusting relationship. It’s also a useful way to increase competitiveness in export markets, which is why buyers often push for sellers to trade on open account terms.

When considering which trade finance route to choose, it helps to separate the options into three categories: pre-shipment finance, post-shipment finance, and supply chain finance (SCF). Let’s explore each one in more detail.

Pre-shipment finance

This describes any finance option that exporters can use before sending goods to a buyer. It could be manufacturing or procurement — or working capital finance to fund wages, production costs, and the purchase of raw materials.

Trade and receivables finance

Trade finance (or import/export finance) is essentially a loan, whereby the exported goods are the main form of security or collateral. Lenders will often fund up to 80% of the total value of the goods, but this varies depending on the risks involved. For example, if there is low demand for the goods (e.g. bespoke furniture) or they have a short shelf life (e.g perishables), a lender may not be able to resell them if the borrower defaults. In these types of cases, the lender may only be willing to finance a small percentage of the total value of the goods.

Inventory or warehouse finance

Businesses often use this as a way to help top-up existing credit lines. In this scenario, lenders keep a quantity of finished goods in a secure warehouse, which are then used by the business as collateral. The lender then provides short-term working capital or loans against the goods, minus a percentage of their value.

Pre-payment finance

This differs slightly from trade finance (or import finance) because the buyer takes out a loan specifically for paying the seller, in advance of the goods being shipped. The buyer then pays the loan back once the goods have been received and sold on. Not only does this ensure quick repayment, but it also allows a lender to clearly link their funding to their trade cycles.

Post-shipment finance

This refers to any type of finance that exporters can use before sending goods to a buyer. Without finance, the exporter would have to wait until the goods arrive, an invoice is raised, and the payment terms take effect — which is usually 30, 60, or 90 additional days. If required, a financier can accelerate payment to the exporter, so it’s received when the goods are sent. This usually occurs as and when they’re loaded onto a ship.

Supply chain finance (SCF) is a cash flow solution that helps businesses free up working capital that would otherwise be trapped in complex global supply chains.

Also known as global SCF (GSCF) or supplier finance, it’s a useful tool for buyers and suppliers alike — as buyers are able to extend their payment terms, and suppliers can get paid early. In addition, SCF allows businesses that import goods to reduce their risk within the supply chain, plus it helps improve relationships between buyers and suppliers. Find out more in this Risk and Insurance guide from Trade Finance Global.

The Trade Finance Global team works with key decision makers at over 270 global banks, funds and alternative lenders, and assists companies looking to access trade and receivables finance. Its team of international staff specialises in everything from machinery to soybeans — and are ready to help you scale up and find the right trade finance product for your business, at no cost to you.

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