What is trade finance?
Trade finance is the set of payment methods, credit and insurance that banks and other lenders use to make cross-border sales safer and to fund the gap between paying for goods and being paid for them. The WTO estimates that 80 to 90 per cent of world trade relies on it. Example (round numbers): a US distributor must pay a supplier 100,000 dollars at shipment, but its own customers pay 60 days after delivery. A supplier finance facility pays the supplier at shipment, and the distributor repays the lender when its customers pay.
- Trade finance covers both how a trade is paid, such as letters of credit and documentary collections, and how it is funded, such as factoring and working capital loans.
- The WTO estimates that 80 to 90 per cent of world trade relies on trade finance, mostly short term.
- Open account terms, usually 30, 60 or 90 days, are among the riskiest methods for exporters and the most attractive for importers.
- Export credit insurance from EXIM covers up to 95 percent of sales invoices against buyer nonpayment.
- A government guarantee on an export loan protects the lender, not the exporter.
How trade finance works
The US Trade Finance Guide sets out a spectrum of payment methods, from the safest for the exporter to the safest for the importer, and a set of techniques that reduce the risk or the cash strain of each.
| Method | How it works | Risk falls mainly on |
|---|---|---|
| Cash in advance | Buyer pays before goods ship | Importer |
| Letter of credit | A bank promises payment against complying documents | Shared, if terms are met |
| Documentary collection | Banks exchange documents for payment or acceptance, without a guarantee | Exporter, partly |
| Open account | Goods ship first; payment due in 30, 60 or 90 days | Exporter |
| Consignment | Paid only after the distributor sells the goods | Exporter |
Source: ITA Trade Finance Guide, chapters 2 to 7. As published on 29 October 2026.
Funding tools sit on top: export working capital loans, often guaranteed by the SBA or EXIM; export credit insurance; receivables finance such as factoring and forfaiting; supplier finance for buyers; and standby letters of credit.
Where a business meets it
- Importers pay deposits at order and balances at shipment, then wait for their own customers to pay.
- Exporters are pressed by buyers for open account terms. The Trade Finance Guide notes they can reduce the risk with credit insurance, factoring or a standby letter of credit.
- New relationships start with a letter of credit or a documentary collection and move to open account as trust grows.
Common mistakes
- Arranging finance after the order. Credit approval takes time; apply before peak season.
- Misreading a guarantee. The Trade Finance Guide notes a government guarantee protects the lender, not the business.
- Assuming insurance covers currency loss. Export credit insurance excludes foreign exchange loss; use a forward contract for that.
- Insuring only some sales. Insurers normally expect the whole export turnover to be covered year to year.
Related terms and how Helm handles it
Helm arranges trade finance, including supplier finance, receivables finance and working capital, case by case; see trade finance. Payments to suppliers go by SWIFT or local rails, with the rate, fee and expected arrival shown before sending.
Open a Helm account
USD, EUR and GBP accounts in your company's name, with a named account manager.
Open accountQuestions
What is trade finance in simple terms?
It is the set of bank products, credit and insurance that make international sales safer and fund the time between paying for goods and being paid. Letters of credit, factoring and supplier finance are all forms of trade finance.
What are the main types of trade finance?
Payment methods such as letters of credit and documentary collections, and funding tools such as export working capital loans, export credit insurance, factoring, forfaiting and supplier finance. Most businesses use a mix, chosen by how well they know the counterparty.
How much of world trade uses trade finance?
The WTO estimates that some 80 to 90 per cent of world trade relies on trade finance, meaning trade credit and insurance or guarantees, mostly of a short-term nature. The International Trade Administration repeats the estimate in its Trade Finance Guide.
What does export credit insurance cover?
It covers commercial losses such as buyer default or insolvency and political losses such as war or currency inconvertibility. EXIM's policies cover up to 95 percent of sales invoices.
References
- World Trade Organization: Trade finance
- International Trade Administration: Trade Finance Guide (2022 edition)
- Export-Import Bank of the United States: Export Credit Insurance
- International Trade Administration: Methods of payment
This guide is general information for businesses, not financial, legal or tax advice. Rules, fees and timings were checked against the sources listed on the review date and may change.