How do trade loans work?

Trade loans are considered to be fully revolving credit facilities that traders use to provide financing in the gap between the purchase of a product and repayment from the end buyer. Lenders will set out a series of documents, such as a purchase order and carriage documents, that the borrower must provide before the two parties can reach an agreement on the facility. The level of security will determine whether the lender has the right to exercise control over transportation.

Where do we see trade loans?

We usually see trade loans when manufacturers and wholesalers need to make large purchases to fill their demand needs. As with other facilities, lenders charge interest on the amount that the borrower owes.

What are the charges for trade finance?

As with most financial instruments, most of the interest and other charges that lenders administer during trade finance will be derived from the level of risk associated with the underlying transaction. The riskier, the higher the fees. Lenders also charge arrangement fees to set the line up as funds are set aside. However, these will all be set on the basis of many possible elements such as security offered, jurisdictions, and insurance cover. This is because the complexity and structure of the transaction will naturally impact the amount of time a lender needs to set it up, which will usually be up to 4 weeks. Often, traders will use other facilities in conjunction with trade loans. Trade loans are advantageous for many reasons. This is because they smooth the transaction cycles allowing the supplier to be paid on time and the borrower to receive effective credit terms. This can also help buyers negotiate supply-side discounts since they are able to make payments to the supplier sooner, which tends to boost a firm's reputation as a trustworthy counterpart. Many firms use this facility to fill seasonal demand or address specific trading cycles. However, since this type of facility caters to shorter-term trades, they do tend to have higher interest charges. These higher charges increase the probability of default. As with any loan, defaulting on a trade loan will negatively impact a borrower's credit score and may impede their ability to secure financing again in the future.

What is a trade loan? | Trade Finance Global

Articles

What is a trade loan?

By Deepesh Patel

Deepesh Patel is Editorial Director at Trade Finance Global (TFG) and host of Trade Finance Talks. Deepesh regularly chairs and speaks at international industry events held by the IFC, EBRD, IMN, WTO, Financial Times and Economist Impact, as well as industry associations including ICC, FCI, ITFA, ICISA and BAFT.

Last updated on 22 Aug 2024

01 Feb 2017 4 min reading time

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What is a trade loan? | Trade Finance Global

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