From a strictly technical standpoint we can look at the Wiki definition which in pure simplicity states that “Trade Finance signifies financing for trade both internationally and domestically…..” (https://en.wikipedia.org/wiki/Trade_finance)
In reality though it’s far more diverse and eclectic an area to be devoid of detail; when you use the word trade finance we are essentially talking about export and import finance (although it can be used to refer to domestic finance-but in reality that is simply finance anyway!).
More often than not you would be in great company to simply or aptly use the term for the finance of international export and import transactions. You would be encompassing the more definitive tools used to carry out this form of finance such as Letters of Credit, Purchase or financing (LCPO for short), Factoring, Forfeiting, and other forms of lending or financing the transaction.
We would also be cloying with the new Uber term for all articles on this subject, despite its overt misuse in many cases, “Supply Chain Finance”. If all fails at a meeting or perhaps over drinks- trot out the words “Supply Chain Finance” and throw in “logistics” but not “synergy” and you will at least sound the part!
In reality, all of the trade finance tools exist due to inefficiencies in the lending market as well the inability of businesses globally to be granted access to all of these forms of trade finance. As global rates have fallen, banks have actually come back into these arenas as they are very high yielding and have ways to mitigate risk.
In addition, today’s lender is competing with so many different sources of funding as well as methods that many have moved back into this area. The reference to “moved back” is of course in reference to the fact that modern banking had as its backbone traditional merchant banking that was in the machine that financed the world for centuries. The result is that after years of straying away from the roots of all mercantile finance (thus the 16th Century term for it “Merchant Banking”), the banks have created departments and hobby hubs of revenue in taking on many of these aspects of lending that offer higher yield than traditional lending. They have also been forced into this proposition due to the fact that non-banking entities are taking clients away.
Trade Finance generally refers to international export and import financing through lending devices such as purchase order, letters of credit, and forfeiting. This is part of a larger package of ways to finance global business and ensconces supply chain finance and factoring, two terms we will look at in other articles in this series.