The Trade Academy at the International Chamber of Commerce has produced this brief guide on 9 July. It explains that trade finance is the term used to describe the settlement arrangements available to buyers (importers) and sellers (exporters) that are used to mitigate risks and ensure the terms and conditions of an underlying commercial contract are met (i.e. the exporter gets paid and the importer receives the goods or services, both with minimal risk) . A typical trade finance transaction will include the buyer (importer), the seller (exporter) and the banks of the buyer and seller. The “traditional” trade finance solution set can be split into 2 main categories:
- Settlement & risk mitigation-driven instruments: these provide payment assurance and/or trigger points for the payment itself. In short, these instruments satisfy the settlement and risk-mitigation needs of a company.
- Finance-driven instruments: These instruments primarily satisfy the financial needs of a company but also provide some risk-mitigation coverage.
The article also considers how Covid-19 has impacted trade finance, saying that the crisis risks further exacerbating longstanding constraints in the trade finance market in a number of strategically important segments from an economic development perspective.