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- Trade finance comes down to one question: who carries the risk between shipment and payment? The four standard answers are cash in advance, letters of credit, documentary collections and open account.
- Pre-shipment and post-shipment finance, including receivables finance, let exporters bridge the wait for payment.
- Every option relies on funders trusting claims about the parties, the goods and the shipment. Verifying them is costly on smaller deals, which is where a publicly checkable ledger like IOTA could help.
Every export deal has an awkward gap. The seller ships the goods, the buyer waits to receive them, and at some point money has to change hands. Trade finance exists to settle who carries the risk during that gap. The answer shapes what a deal costs, who wins it, and whether it happens at all.
Four ways to get paid
There are four standard payment terms, and each moves the risk in a different direction.
Cash in advance means the buyer pays before anything ships. It is the safest route for the exporter, but few buyers will accept it, so it is hard to win customers this way.
Letters of credit put a bank in the middle. The buyer’s bank promises to pay once the exporter presents the correct shipping documents, so the seller relies on the bank’s word instead of the buyer’s.
Documentary collections also use banks, but with less protection. Banks pass the paperwork along and release it to the buyer only against payment or a promise to pay. No bank guarantees the money itself.
Open account reverses the first option. The goods ship and arrive first, and the buyer pays later, typically within 30, 60 or 90 days. Buyers like it best, and exporters carry the most exposure.
Financing the wait
Exporters can also borrow their way through the gap. Pre-shipment finance covers the cost of buying or making the goods. Post-shipment finance, such as receivables finance, advances cash against an invoice or the shipping documents until the buyer settles. Either way, the seller doesn’t have to leave working capital tied up in transit.
Also Read: IOTA’s Showcases Are Either the Real Thing or the Best-Dressed Pilot Program in Crypto
The catch: funders must trust the story
Every one of these tools depends on someone believing what they are told about the trade: who the parties are, what was sold, and whether it actually shipped.
Checking those claims takes time and money. On a smaller deal, the return may not cover the cost of verification. Funders pass, and smaller exporters are left with fewer options.
Where a public ledger fits
This is the gap IOTA’s pitch targets. On a public ledger, a record can be checked by anyone relying on it, rather than only by the party that produced it. That doesn’t change the four payment terms or remove the need for financing. It could lower the cost of confirming the basics, which is the part that currently makes small deals unattractive to fund.
Whether that translates into cheaper, faster trade finance will depend on adoption by banks, funders and traders. The underlying problem is real, though. Trade runs on trust, and trust is expensive to verify.
Disclaimer: The information in this article is for general purposes only and does not constitute financial advice. The author’s views are personal and may not reflect the views of Chain Affairs. Before making any investment decisions, you should always conduct your own research. Chain Affairs is not responsible for any financial losses.
With a keen eye on the latest trends and developments in the crypto space, I’m dedicated to providing readers with unbiased and insightful coverage of the market. My goal is to help people understand the nuances of cryptocurrencies and make sound investment decisions. I believe that crypto has the potential to revolutionize the way we think about money and finance, and I’m excited to be a part of this unfolding story.
