Trade finance typically means the support of international transactions. These transactions can be riskier than domestic transactions because of the many differences in dealing in varying markets with new customers. Trade finance refers to a collection of solutions that can provide risk mitigation and enhanced cash flow during those transactions.

At ATB we use third parties to enhance credit, including third party guarantees and trade credit insurance. These products help to reduce the risk of a transaction.

The products under trade finance are all regulated individually and each have a set of rules that must be followed. ATB’s trade finance team has expertise in each set of rules.

Yes. Trade finance loans, like standard loans, are secured.

Trade finance includes a range of financial offerings, including:

• letters of credit
• documentary collection
• trade credit insurance
• export financing

Visit each of their pages to learn more or contact your ATB Business Advisor or Relationship Manager.

A letter of credit (LC) is a written commitment by a bank on behalf of a buyer that payment will be made to the beneficiary (seller), provided that the terms and conditions stated in the LC have been met. Here are the steps for you to get paid using a letter of credit:

1. Agreement: the buyer and seller agree to do business under a letter of credit.
2. Issuance: the buyer applies for a letter of credit from their bank (called the “issuing bank”). The bank then issues the LC and sends it to the seller's bank (the “advising bank”).
3. Confirmation: the advising bank verifies the LC and sends it to the seller.
4. Shipment: the seller then ships the goods to the buyer and presents the required shipping documents (bill of lading, invoice, packing list, insurance documents, etc.) to their bank.
5. Verification: the bank verifies the documents against the LC. If the documents comply with the LC, the bank will pay the seller.
6. Reimbursement: the issuing bank then reimburses the seller's bank.
7. Payment: lastly, the issuing bank presents the documents to the buyer and debits their account for payment. The bank only checks the documents for compliance with the LC terms—it doesn’t check the goods or services themselves. Therefore, it's crucial that the LC terms and conditions are clearly and accurately specified.

These two terms are often used interchangeably. However, there are slight differences in the rules for bank guarantees versus standby LCs. Both are used to provide assurance of payment or performance in various types of contracts. The term “bank guarantee” is the oldest form of guarantee and is used heavily in Europe and Asia, while the term “standby letter of credit” was coined more recently in the USA. We can issue either document and are experts in the different rules governing each of them.

While a letter of credit significantly reduces payment risk in international trade by providing a guarantee from a reliable financial institution, it doesn’t completely eliminate all risks. Here are some potential risks that may still exist:

1. Fraud risk: the documents presented may be false or the goods shipped may not align with the terms of the contract.
2. Documentary risk: the seller may not comply with the terms and conditions of the letter of credit, leading to non-payment. For example, the seller may not present the documents as required or within the stipulated time.
3. Political and legal risk: changes in government regulations, imposition of trade sanctions or political instability in the buyer's or seller's country could impact the execution of the letter of credit.
4. Force majeure: unforeseen circumstances like natural disasters, war, strikes, etc., could prevent the seller from fulfilling the contract, leading to non-payment.

While a letter of credit provides a strong level of security in international trade, it’s not entirely risk-free. Both parties should conduct due diligence and consider risk mitigation strategies, including getting a confirmed letter of credit, insuring the goods, or using reputable freight forwarders and inspectors.

If you’ve negotiated an LC as payment, reach out to your relationship manager to put you in touch with ATBs’ trade finance team. A documentary LC might not be the best payment method in all situations—we can help you to decide if it’s the right fit for you and your customer.