Trade finance assets
A host of trade finance arrangements are available in the entire lifecycle of a trade, generating opportunities for trade assets.
Trade finance assets can be classified under various trade products like letter of credit (LC) – import or export, loans for import and export – guarantees, standby LC, supply chain finance, and commodity finance.
Letter of Credit (LC): LC is a payment undertaking issued by a bank or financial institution on a buyer’s behalf, guaranteeing on-time payment to a seller for the specified credit amount. While issuing an LC, the importer’s bank (issuing bank) blocks the credit limits of the importer so that the bank can own the liability on behalf of the importer. For exports, on the exporter’s request, the exporter’s bank (confirming bank) can take on the liability by blocking the funds of the issuing bank in exchange for a fee. Similarly, credit limits would be blocked during loans for import and export, depending on the bank’s role. The assets created by blocking these credit limits can subsequently be traded in the market as trade finance assets.
Guarantees or standby LC: While the LC is issued for performance (for example, supply of goods), the guarantees or standby LC is issued for non-performance. It guarantees the bank’s payment to a seller if the buyer defaults on the agreement, like not completing constructions on time. The assets created by blocking the credit limits can subsequently be traded in the market as trade finance assets.
Supply chain finance (SCF) or trade receivables: SCF optimizes working capital stuck in global supply chains and provides liquidity to both buyers and sellers. This SCF-generated financing asset can be traded in the market.
Commodity finance: Banks offer financing for commodities including but not limited to metals, mining, energy, and agricultural products. The bank blocks the borrower’s credit limits for financing these commodity transactions, which can subsequently be traded in the market as trade finance assets. The financing can be short-term or medium-term, depending on the contract.