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FINANCE PROVIDERS

Finance Providers

Trade financing can be considered a huge driver of economic development as it helps to maintain the flow of credit in supply chains. As per various data it is concluded that 80-90% of global trade is reliant on trade finance, and it’s estimated worth is around USD $10 trillion a year.

Trade finance includes the following:

  • Lending facilities to importer and exporter
  • Issuing  LC’s, documentary collections etc
  • Provide companies with funds against invoices and accounts receivable - Export factoring
  • purchase the traded goods from an exporter- Forfaiting
  • Provides Export credits to reduce risks
  • During delivery and shipping it covers currency and exposure risks – Insurance

Types of trade finance lenders

There exist many service providers for trade finance, thus it becomes crucial for business owners to choose the correct lending institution to access credit. Providers are generally categorised as:

  • Commercial Banks
  • Development finance institutions
  • Alternative finance and Non-Bank funders

Commercial Banks

Some commercial banks include specialised trade finance divisions, to offer facilities to businesses. Majority share of financial institutions globally are represented by commercial banks. Commercial bank may range in size from small and niche banks to large multinational banks.

The financing services offered by trade finance commercial banks include:

The global presence and credibility of commercial banks is a key factor for getting trade finance from them. However the small domestic banks can be advantageous for SMEs. Being niche, it will be easier to accommodate the specific needs of SMEs.

Development Finance Institutions

Development finance institutions (DFIs) are also known as development banks. These help to provide trade finance for promoting economic development. These are often country- specific, as well as target specific. These can be classified as per mid- to long-term trade finance within the agricultural, mining and projects sector. Development finance institutions provide

DFI’s are often directly or indirectly funded by governments. Such institutions operate as joint ventures in emerging markets. They can even provide insurance and guarantees as the countries may face political and socio-economic risks.

Even there are Export Credit Agencies (ECAs), which are generally government backed institutions to guarantee a domestic company’ exports.

Alternative Finance and Non-Bank Funders

Certain types of financial institutions do not use public deposits as a funding resource. Such funding sources include

  • Crowd-funded (pooled) investment
  • Private investment
  • Public market sources

Because of economic crises traditional receivables- backed finance was disrupted by smaller finance platforms which lead to decrease in appetite in terms of risk by larger banks. From such situations the doors for smaller finance lenders were opened to fill in the gap that arose due to the economic crisis. Alternative finance such as private investment funds and crowd-lending (peer to peer) entered the trade finance sector.

Who benefits from trade finance?

Export finance has many beneficiaries:

  • developing countries
  • governments
  • small and medium enterprises

SMEs are considered as engines for economic growth and development, which accounts for around 99% of businesses, 50% of employment and drives around 30% of private sector revenue of the country.