What are the types of trade finance lenders?
There are many service providers of trade finance; it is crucial that business owners choose the correct lending institution to access credit. Providers can generally be split into commercial banks and alternative finance institutions.
What are commercial banks?
Some commercial banks have specialised trade finance divisions, which offer facilities to businesses. Commercial banks represent the majority share of financial institutions globally, although they range in size from small and niche banks to large multinational banks.
The banking services offered by trade finance commercial banks include: issuing letters of credit, accepting drafts and negotiating notes, bills of exchange and documentary collections. The advantage of larger commercial banks over smaller niche banks is twofold: their global presence (they may have foreign subsidiaries which makes L/C confirmation cost effective), and their credibility.
Smaller domestic banks can however be advantageous to SMEs too – being niche, it can be easier to accommodate the specific (albeit riskier) needs of SMEs.
Development Finance Institutions
Development finance institutions (DFIs), also known as development banks, help provide trade finance to promote economic development. They are often country specific, and target specific types of mid- to long-term trade finance in the agricultural, mining and projects sector. Development finance institutions can provide standby letters of credit, discounting facilities, project financing and are often directly or indirectly funded by governments. DFIs often operate as joint ventures in emerging markets which means that they can provide insurance and guarantees given that the countries may face political and socio-economic risks.
Alternative Finance and Non-Bank Funders
There are many types of financial institutions that do not use public deposits as a funding resource. Funding sources include crowd-funded (pooled) investment, private investment and public market sourced.
Traditional ‘receivables-backed finance’ has been disrupted by smaller finance platforms since the economic crisis. This has been driven by a decrease in appetite for risk by larger banks, which has opened the doors to agile smaller finance lenders, who can fill the gap. Private investment funds and larger banks back alternative trade financiers. Crowd-lending (peer to peer) finance has also entered the trade finance sector. In addition to this, new technologies to disrupt the somewhat lengthy application process for certain types of trade finance make it easier to assess risk, supply credit and documentation to importers and exporters have crept onto the scene.
NEXT >> The credit process and securing finance