One of the oldest or we can say most common form of short-term global trade finance a is the letter of credit.
The LC is provided by the importer bank to the exporter (or exporter’s bank). The document specifies: “I’ll pay you the specified amount when you ship the right goods to me.” In this manner the supplier takes the payment risk in the presence bank (this is because bank risk is lower than corporate risk.)
Exporter get paid after presenting correct documents with the bank i.e. proof of shipping the correct goods, bill of lading and other specified documents Quite often, the transaction involves confirming bank which confirms the LC provided by the importers bank. They verify all the documents (proof of export against the LC requirements) and then pay the supplier the due amount.
This is used to finance high value supply chains. These tend to be long term trade finance even sometimes up to five years.
It includes various methods of finance for producers and traders of goods. These are
Export credit agencies (ECAs) are public but government owned agencies which are available to provide government backed loans and guarantees insurance for exporters from their home country who are seeking to do overseas business.
ECAs help to promote the exports by insuring global trade transactions that take place in risky markets.
An ECA’s role is limited to guaranteeing transactions, and one can have more than one ECAs to guarantee the deal having different parts and involves exporters from various countries. However, more and more ECAs are providing direct loans.
At both pre-shipment and post-shipment stages it provides credit facilities and techniques of payment.
There are a number of private insurance companies that provides insurance protection against credit and political risks to clients which includes banks and other financial institutions, suppliers and buyers, traders and foreign investors. It protects against non-payment.
Political risk insurance also protects against non-payment which occurs due to exposure to political events, including acts of terrorism and war and other political violence. It also covers the risk of payments that cannot be made due to actions by a foreign government.