Trade Finance

International trade involves risks that domestic trade often does not. Exporters worry about not being paid, importers worry about paying for goods that never arrive, and both may face currency, political and legal risks. Shipping can also take weeks, tying up cash.

Trade finance addresses these issues. Common tools include letters of credit, in which a bank guarantees payment once documents proving shipment are presented; documentary collections, in which banks handle documents in exchange for payment; bank guarantees; export credit insurance; and financing that lets exporters receive cash early or importers pay later.

For example, an exporter in Germany selling machinery to a buyer in Brazil might ask for a letter of credit from the buyer's bank. The exporter ships the goods, presents the shipping documents and receives payment from the bank.

Trade finance is provided by banks, specialist lenders and government export credit agencies. Much of global trade relies on it, and shortages of trade finance can hurt trade, especially in developing economies.