Module 04 · Trade Finance7 min read
Financial instruments in trade
Guarantees, drafts and the tools that secure a deal.
Beyond the letter of credit, a handful of instruments turn promises into bankable security. Knowing what each one does — and what it doesn't — keeps you from being caught out by misused 'instruments' that are common in scams.
- Bill of exchange (draft)
- A written order to pay a sum on a date (at sight, or e.g. 90 days). Once 'accepted' it's a negotiable promise to pay.
- Standby letter of credit (SBLC)
- A bank guarantee in LC form: it pays only if the buyer defaults — a safety net, not the primary payment route.
- Bank guarantee
- A bank's promise to cover a party's obligation if they fail to perform.
- Avalisation
- A bank adds its guarantee ('per aval') to a bill of exchange, making the draft far stronger.
- Forfaiting
- Selling medium-term trade receivables to a forfaiter at a discount, without recourse, for cash now.
- Factoring
- Selling short-term receivables to a factor for immediate cash, who then collects from the buyer.