Trade finance funds the gap between when a seller ships goods and when a buyer pays for them. It is among the oldest forms of lending, and its structure explains why it has historically been low risk: each transaction is short, tied to specific goods, documented at every step, and repaid by the sale of what was financed. Lenders call that self-liquidating.
Letters of credit
A documentary letter of credit is a bank’s promise to pay the seller when the seller presents documents that comply with the credit’s terms: commercial invoice, transport document, insurance certificate, inspection certificate and so on. Most letters of credit are issued subject to the International Chamber of Commerce’s Uniform Customs and Practice for Documentary Credits, known as UCP 600. The bank pays against documents, not goods, so precision in the paperwork is everything.
Documentary collections
In a documentary collection, banks handle the documents but do not promise payment. The buyer receives the title documents only when it pays (documents against payment) or accepts a draft to pay later (documents against acceptance). It is cheaper and simpler than a letter of credit, with less protection for the seller.
Receivables and supply chain finance
- Receivables finance: a seller borrows against, or sells, invoices owed by its buyers, turning sixty or ninety days of waiting into cash today.
- Payables finance (often called supply chain finance): a large buyer arranges for its suppliers to be paid early by a financier, based on the buyer’s approval of their invoices and the buyer’s credit.
- Inventory and pre-export finance: lending against goods in storage or in production, with controls over the goods and the sales contracts.
- Structured commodity finance: larger facilities secured by commodities and the contracts to sell them, with collateral managers, inspection and hedging.
Why default rates are low
The International Chamber of Commerce collects data on trade finance performance from banks around the world in its annual Trade Register. Its findings have consistently shown low default rates across trade products, with export letters of credit and payables finance among the lowest-risk products on an exposure-weighted basis. The 2025 edition, covering data through 2024, analyzed more than 47 million transactions.
“Short, tied to real goods, documented at every step, and repaid by the sale of what was financed.”
Where the risk actually sits
- Fraud: duplicate invoices, fictitious goods or forged documents. Verification of goods, counterparties and shipping data is the main defense.
- Concentration: too much exposure to one buyer, one commodity or one corridor.
- Country and transfer risk: a buyer that can pay but cannot get currency out.
- Sanctions and financial crime: screening of parties, vessels, goods and routes before any transaction, and throughout.
What a financier will ask for
- The underlying sales contracts and the parties to them
- Shipping and title documents, and how goods are inspected and insured
- Payment history with the buyers being financed
- Ownership and control information for know-your-customer checks
- Where the goods come from and where they are going
For general information only. This is not an offer or commitment to lend, insure or invest, and not legal, tax, accounting or investment advice. Terms, availability and eligibility vary and are subject to credit approval and applicable law. Fortuneo Redux Reinsurance, Ltd. and Fortuneo Manens Life & Annuity Company are planned entities and are not licensed.