What are the Types of Trade Finance Lenders?
There are different types of trade service providers. When accessing trade finance, it is crucial that business owners choose a suitable lender. Trade finance providers can generally be split into banks and non-bank lenders (funds and alternative financial institutions).
Corporate & Commercial Banks
Banks take deposits. They are therefore able to offer a relatively low cost of finance to businesses, compared to alternative lenders. However, a bank is usually under heightened regulatory pressure, so there are longer decision timeframes and less flexibility.
The main difference between corporate and commercial banking is the size of the clients. In general, Corporate & Investment Banks (CIB) service larger clients and larger transactions, whereas Commercial Banks cater to a wider range of smaller clients.
Banks account for the majority of financial institutions globally, although they range in size from small regional operators to large multinationals.
Larger banks typically have a stronger international reputation, so can provide cross-border services at a lower cost than smaller banks e.g. LC confirmation. However, smaller banks are usually able to offer flexibility and tailored products. Smaller domestic banks can also be advantageous to SMEs too – being niche, it can be easier to accommodate the specific (albeit riskier) needs of SMEs.
The banking services offered by trade finance banks include: issuing letters of credit (LCs), accepting drafts and negotiating notes, bills of exchange and documentary collections (DCs).
Some larger commercial banks have specialised trade finance divisions, which offer trade services and debt facilities to businesses.
Alternative Finance Providers & Non-Bank Lenders
These types of financial institutions do not take deposits. Instead, they obtain funding from other sources – including public markets, private investment and crowd-funded (pooled) investment. Many raise finance from banks and funds. As a result, the cost of finance they offer can be significantly higher than a bank.
Since the 2008 economic crisis, the regulatory burden on banks has increased. As a result, many have decreased their risk appetite and scaled back their activities with SMEs (which are seen as high-risk clients). This has created a gap in SME banking services, which many other market players are trying to fill.
Non-bank lenders are typically unregulated, with higher risk appetite, faster processes driven by technology, but higher-cost of debt.
New technologies and platforms have been developed to disrupt the traditional lengthy application processes for trade finance products – including risk assessment, documentation to importers and exporters and supply credit.
Development Finance Institutions
Development Finance Institutions (DFIs), also known as development banks or Development Finance Companies (DFCs), help to provide trade finance to businesses in order to promote economic development.
DFIs are often directly or indirectly funded by governments, and therefore tend to be country or region-specific. DFIs usually operate as joint ventures in emerging markets, where they provide insurance and guarantees against political and socio-economic risks to encourage investment. DFIs can also provide standby letters of credit (SBLCs), invoice discounting facilities and project finance.
The products offered typically targets particular types of mid-term to long-term trade finance for projects – for example, in the agricultural or mining sectors.
Export Credit Agencies (ECAs)
There are also Export Credit Agencies (ECAs), which are government-backed institutions that guarantee a domestic companies’ exports. Find out more about the different ECAs around the world on our ECA hub here.
Trade Finance Hub
1 | Introduction and the benefits
2 | Types of trade financing
3 | Methods of payment
4 | Pre and post-shipment finance
5 | Risks and challenges
6 | Trade and export finance providers
7 | The credit process and securing finance
8 | SME Trade Finance Guide