Estimates indicate that 80-90% of global trade, worth approximately $10 trillion per year, relies on trade and supply chain finance.

This makes trade finance – which can also be referred to as supply chain finance, import finance, or export finance –  a massive driver of economic development by helping to maintain the flow of credit in supply chains. 

Many stakeholders, including corporates, SMEs, and governments, benefit from the added economic boost that comes from trade finance.

Companies use trade finance to increase the volumes of goods and services they trade, fulfil large contracts, and scale operations internationally.

Governments also assist with guaranteeing trade finance, as they aim to increase the trade of goods and services.

‘Trade finance’ is a catch-all term for the financing of international trade. 

There are several different types, but these are generally categorised as:

• Trade credit
• Cash advances
• Purchase order (PO) finance
• Receivables discounting
• Term loans
• Other types of business finance

In this SME trade finance guide, we cover the four most popular types of payment methods: cash advances, letters of credit (LCs), documentary collections (DCs), and open account sales.

Each of these payment types introduces different levels of risk for the importer and the exporter. 

When establishing a new relationship, buyers and sellers usually use intermediaries, such as banks, to limit risk, since the intermediaries can guarantee that payments are made on schedule.

As trust develops between a buyer and seller, businesses may switch to cash advances or provide trade credit on open account terms.

These latter methods, while introducing additional counterparty risk, reduce fees and create a faster and simpler payment environment.

As a business owner, it is important to understand the different risks of each type of payment method, to see which one is most favourable and suitable for your business requirements.

The COVID-19 pandemic has exacerbated the challenges for SME access to trade and export finance since financing providers perceive a jump in supply chain disruptions and increased non-delivery and non-acceptance risks.

However, in many countries supplying the UK, default risk on trade-related short-term financing remains relatively constant at around 2% and trade in some sectors is at levels above those of the same period in 2019.