The process of securing international trade finance

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Choosing the right suppliers can be a make or break decision for any business, and that’s especially so when it comes to trade finance. In this guide, we’ll run you through the main types of trade finance lenders available, and the steps involved in a typical application process.

There are two main kinds of trade finance providers: corporate/commercial banks, and alternative or ‘non-bank’ lenders.

1. Banks

Banks are a popular source of trade finance because their cost of borrowing is often lower than most alternative lenders. The specific services offered will vary, but usually include things like issuing bills of exchange and letters of credit, and accepting drafts and negotiating notes.

There are two main types of bank: large corporate and investment banks (CIBs), and smaller commercial banks.

Corporate and investment banks (CIBs) These providers typically manage larger clients and transactions, and their strong global reputation means they can provide cross-border services at a lower cost than smaller banks. Some larger commercial banks also have specialised trade finance divisions that offer trade services and debt facilities.

Commercial banks Smaller domestic banks can be advantageous to SMEs because their financial products may be more flexible and tailored to specific niche categories and verticals. Like any bank though, their heightened regulatory pressures can make the decision-making process more time-consuming and less flexible.

2. Alternative finance providers and non-bank lenders

These types of lenders tend to be unregulated, which means their processes are often faster than traditional banks. However, because many of them raise funding from sources such as banks, private investment, and crowd-funded (pooled) investment, the cost of the finance they offer can be significantly higher.

Examples of alternative providers include:

Development finance institutions (DFIs) Also known as development banks or development finance companies (DFCs), these firms typically provide finance as a way to generate or promote economic development. Often, this is for mid- to long-term projects, such as within the agricultural or mining sectors. DFIs usually operate as joint ventures in emerging markets, where they encourage investment and provide insurance and guarantees against political and socio-economic risks. They can also supply standby letters of credit (SBLCs), [invoice discounting facilities, and project finance.

Export credit agencies (ECAs) These are government-backed institutions that can help ensure a domestic company’s exports. They tend to structure their finance and insurance around non-conventional risks, such as overseas commercial liabilities or political risk. You can find more information on Trade Finance Global’s ECA hub.

While each lender’s requirements, interest rates, repayment conditions, and appetite for risk will vary, the application process typically follows these key steps:

Step 1: credit application

Here the lender will ask your business for a range of information, such as the individuals/directors involved, plus proof that the business is already actively trading either domestically or internationally. The main items could include things like 2-5 years of financial statements; details of any loans or other liabilities; and any current purchase orders or invoices from clients or suppliers. You’ll also be expected to provide a business plan showing how the finance will be used, and a financial forecast that shows your idea is realistic and achievable.

As a general guide, your business plan should include an introduction to your business and its visions, goals, and significant achievements to date. You’ll also need to give an overview of your sector and the competitive landscape, along with a summary of the anticipated results.

Step 2: application evaluation

Next, the lender will undertake a full credit risk assessment on your business — based on your balance sheet, cash flow, and other documents provided or collateral offered. Typically, the evaluation stage also involves a credit scoring process, which takes into account any potential market vulnerabilities, probability of default, and even the quality of your management team. Credit scores are normally ranked from ‘very low risk of default’ (AAA) to ‘likely to result in refusal of a loan application’ (D).

Stage 3: negotiation

If your business is eligible for trade finance, you can then begin negotiating specific terms. Ultimately, the goal of any borrower will be to secure finance on favourable price and terms, such as non-interest costs, fees, and interest rates. To get a better deal, you’ll need to be well-prepared and have a solid understanding of the charges/fees at stake, and the overall structure of the loan and insurance. Your local trade body may well be able to advise you on this.

Stage 4: loan approval process and documentation

If the loan is agreed in principle, the lender’s legal team will check that your collateral can be secured and protected, and any risk of default has been mitigated. The loan document containing a full description of the finance (e.g. amount, duration, interest rates, and so on) is then signed by both parties. This document also states any obligations of the buyer and lender, including steps to follow in the event of disputes or a default.

Stage 5: repaying the loan

Naturally, your business must then repay the debt (including interest) in a timely manner, according to all contractual and legal obligations. Successfully meeting the conditions and terms of the loan will also help ensure your company’s credit rating is protected — ready for any future borrowing requirements as trade volumes increase, and new market opportunities present themselves.

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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