Trade Finance Jargon Buster

Why is global trade relevant?

Trade is taking centre stage in world affairs, and with good reason because the trading of goods and services, particularly across global borders, is what fuels economies to survive, enabling commodity-led markets to export raw materials to manufacturing-led markets which then sell on their finished products to consumers around the world, such that people in the West can enjoy goods produced in the East and people in the North can enjoy foods harvested in the South. Trade is truly global, worth an estimated $18 trillion.

Define key terms related to trade finance

1. Trade Finance
   • The provision of risk management and/or working capital to importers and exporters to facilitate the physical movement of goods and services along a commercial supply chain.

2. Vanilla or Traditional Trade Finance
   • The provision of import Letters of Credit, bid and performance bonds and payment guarantees/Standby Letters of Credit or the advising/confirmation/discount of export Letters of Credit in support of day to day trade for the financier’s customers.

3. Commodity Finance
   • The provision of specialist support to the trading of basic raw materials in which the lender would often be looking to self-liquidating transactions rather than to a customer’s balance sheet. The rationale of Commodity Finance is to support the flow of essential raw materials to the industry, and lenders will focus on the movement of strategic goods. Commodity Finance is recognised by the regulators as Specialised Lending.

4. Structured Trade & Commodity Finance
   • Refers to the provision of support for medium-term deals (1 - 3 years) where typically a borrower’s weak balance sheet is mitigated by his strong performance capability with repayment coming from an acceptable third party off-taker. This type of deal is prevalent in the emerging markets where payment typically comes from an OECD buyer.

5. Export Finance
   • Taken to refer to the provision of funding for medium to long-term projects (3 –-7 years) involving the export of capital goods supported by a national Export Credit Agency (ECA) or a Multi Lateral Agency (MLA). The financier would normally arrange or participate in a syndicated financing for the project and would benefit from the cover provided by the ECA or MLA (which is typically around 80% to 90% subject to the project and sponsors).