Trade finance basics
Bridging the gap between paying out and getting paid.
Every physical trade has a gap: you pay your supplier when (or before) the cargo loads, but your buyer pays you only when it arrives — weeks later. Multiply a cargo's value by that delay and you need a lot of cash. Trade finance is how traders fund that gap without tying up their own capital, and it's a big reason small traders can move cargoes worth far more than their net worth.
Why banks are willing to lend
Good trade finance is self-liquidating and collateralised by the goods themselves. The bank isn't betting on the trader's whole business — it's financing one transaction whose cargo and sale proceeds repay the loan. By controlling the documents (especially the bill of lading), the bank effectively controls the cargo until it's paid. This is 'transactional' finance, as opposed to lending against a company's whole balance sheet.
- Self-liquidating
- The transaction repays itself: the sale proceeds clear the loan that funded the purchase.
- Collateral
- What secures the loan — here, the cargo, controlled via the documents.
- Transactional vs. balance-sheet finance
- Funding one deal against its goods vs. lending against the company overall.
- Borrowing base
- A revolving facility sized against the value of inventory and receivables the trader holds.
- Pre-export / prepayment finance — funds a producer before shipment, repaid from the cargo.
- Documentary letters of credit — a bank promises to pay against compliant documents (next lessons).
- Documentary collections — banks pass documents in exchange for payment or a payment promise.
- Receivables finance / factoring — selling the right to be paid by the buyer for cash today.