Improving the SMEs Access to Trade Finance DRAFT
in the OIC Member States
10
source inputs to production, produce the relative goods and arrange for the sale and export of
those same goods. In the case of pre-shipment financing, it is notable that the goods may not
yet exist to serve as security for the lender, that no invoice or other similar legal obligation or
instrument of title (ownership) to the goods yet exists, however, there would typically be a
purchase order issued from the importer to the exporter, and some financiers are prepared to
provide financing and liquidity on the basis of the existence of the purchase order.
While the area of pre-shipment finance is gaining greater focus and attention, there is
significant activity in post-shipment finance, as the transaction is then already well underway,
and a lender has several options in terms of financing mechanisms and options, as well as
transaction events against which financing can be arrange. Such events (Aberdeen Group,
2005) can include a variety of occurrences, such as the acceptance of an invoice for payment
by the importer – referred to as an “approved payable”. Likewise, in post-shipment stage,
instruments such as drafts have been issued, and the existence of this type of bank instrument
also allows for financing to take place.
As noted earlier, financing can amount to simply allowing an exporter to be paid earlier, or an
importer to complete their payment obligation later than was intended, by having the
bank/lender meet the financial obligation at the originally agreed time. As an example,
importer and exporter might agree to payment 90 days after the goods have been loaded onto
the vessel for shipment to the importer. If the exporter has sufficient cash flow, they may
choose to wait those 90 days, however, there is also the option to ask a trade bank involved in
the transaction to pay the exporter immediately (discounting the 90-day receivable), and to
then collect funds from the importer or the importer’s bank 90 days hence. The financing bank
will of course charge fees and interest for doing this.
Similarly on the import side, buyer and seller might agree to payment “At Sight” meaning, at
the moment that compliant documents are presented by the exporter for payment and have
been “seen” by the verifying bank and deemed compliant. Normally, a payment would involve
sending monies to the exporter and immediately debiting the importer’s account to cover the
payment. In some cases, an importer may not have funds to cover such a transaction, and may
ask a bank to pay the exporter, but wait 60 days (until the goods have been received and sold,
and thereby, revenues generated) until debiting the importer’s account. In this scenario, the
exporter is paid in the agreed timeframe, but the importer does not cover the payment until 60
days later – in effect, having been financed for that period, again in exchange for applicable fees
and interest.
The critical importance of financing to the conduct of international trade was brought sharply
into focus by the global crisis of 2007/2008 and beyond, and the fundamentally important
contribution of trade finance to economic value creation was demonstrated beyond debate,
with the highest levels of political leadership, international institutions and other entities
explicitly focusing on trade finance as a critical enabler of international commerce.
The importance and benefits of trade finance are identified (ITC/UNESCAP, 2005) as:
 Reduced capital outlay, improving the financial and liquidity situation of importing
and exporting firms
 Reduced risk, covering risks of non-payment or non-performance of contract
obligations, reduced foreign currency risk and related