Welcome to the 2022 edition of The Trade Finance Guide: A Quick Reference for U.S. Exporters. The Trade Finance Guide is developed and published by the International Trade Administration (ITA) of the U.S. Department of Commerce at https://www.trade.gov/trade-finance-guide-quick-reference-us-exporters.
A copy of this public-domain document is offered here as a convenience to U.S. exporters visiting the Export-U.com website.
This guide explains the basics of trade finance so that U.S. companies, especially small- and medium-sized enterprises (SMEs), can evaluate appropriate financing options to help ensure they get paid for their export sales. This update of The Trade Finance Guide supports the Administration’s initiative to expand the number and diversity of U.S. businesses competing in global markets as outlined in the federal inter-agency Trade Promotion Coordinating Committee’s 2022 National Export Strategy.
The updated Guide includes a new chapter addressing the recent surge in business startups and potential sources of capital that can help these new companies consider exporting and compete in niche markets globally. You will also find information on how digitalization is helping to transform trade finance, with the prospect of increasing access, streamlining processes, and reducing costs. We have also included introductions to each of the three U.S. government export finance agencies in their respective chapters and have updated other chapters, as appropriate, in collaboration with experts from relevant fields. We will be continuously updating the online Trade Finance Guide on an as-needed basis, with a revised PDF (Portable Document Format) version available for download on an annual basis.
A Quick Glance
Trade Finance Guide: 8BA concise and easy-to-understand guide that explains the basics of trade finance so that U.S. exporters can evaluate financing options to help ensure they get paid for their export sales.
Trade Finance: 10BA set of techniques or financial instruments used to mitigate the risks inherent in international trade to ensure payment to exporters while assuring the delivery of goods and services to importers.
Opportunities: (1) Reaching the 95 percent of potential customers who live outside the United States; (2) Diversifying customer portfolios.
Challenges: (1) Non-payment or delayed payment by foreign buyers; (2) Country, commercial, and foreign exchange risks as well as cultural influences.
Benefits of Exporting
The United States is the world’s second largest exporter, with $2.5 trillion in goods and services exports in 2021, according to the U.S. Census Bureau and the U.S. Bureau of Economic Analysis. However, less than one percent of America’s 32 million companies export; and of those do, about 60 percent sell to just one or two markets—Canada and Mexico, for example. And SMEs, which account for 98 percent of the nearly 280,000 American exporters, are even less likely to export to more than one market. With 95 percent of the world’s consumers living outside of the United States, beginning to export-- or expanding to additional export markets—can help SMEs expand their sales, diversify their portfolios, and insulate them against periods of slower growth in the domestic economy.
Trade Finance
Trade finance is a set of techniques or financial instruments used to mitigate the risks inherent in international trade to ensure payment to exporters while assuring the delivery of goods and services to importers. In other words, trade finance is a means to turn cross-border trade opportunities into real transactions by effectively managing the competing risks as well as the inherent risks facing both exporters and importers. The WTO estimates that trade finance plays a key role in facilitating and supporting as much as 80 to 90 percent of international trade. However, the availability of trade finance and the risk of non-payment are among the most often cited obstacles by U.S. SMEs considering selling in global markets.
Types of Risks Facing Exporters
Below are the major types of risks facing exporters.
• Country risk is the risk of exposure to financial loss caused by political, economic, and social conditions and events in a foreign country.
• Commercial risk is the risk of non- and delayed payment caused by the importer’s insolvency or cash-flow problems.
• Foreign exchange risk is the risk of exposure to financial loss due to the fluctuation of an exchange rate change when trading with countries that have a different currency.
• Cultural influences are an additional risk factor that can negatively affect all aspects of international business.
Trade Finance Providers
Below are the three major types of U.S. trade finance providers.
• Commerial and corporate banks offer a relatively low cost of finance to exporters by taking deposits, compared to non-bank lenders. In general, commercial banks service a wider range of SMEs, whereas corporate banks service large corporations. Because banks are tightly regulated, they are less flexible and slow in making a lending decision.
• Alternative finance providers (AFPs) have been leveraging new technologies to try to fill a SME lending service gap created by traditional banks after the 2008 global financial crisis. Because AFPs do not take deposits but obtain funding from public markets and private investments, the cost of finance they offer can be higher than a bank. However, since AFPs are generally lightly regulated or unregulated, they are more flexible in serving SMEs with faster processes driven by technology.
• U.S. government export finance agencies provide financing to support U.S. exports and jobs when private-sector lenders are unable or unwilling to assume commercial and country risks. These agencies include: (1) Export-Import Bank of the United States; (2) U.S. Small Business Administration; and (3) U.S. Department of Agriculture’s Commodity Credit Corporation.
International Trade Administration
The Trade Finance Guide is developed and published by the International Trade Administration (ITA) of the U.S. Department of Commerce. ITA strengthens the competitiveness of U.S. industry, promotes trade and investment, and ensures fair trade through the rigorous enforcement of our trade laws and agreements. ITA is organized into three distinct but complementary business units: (1) Global Markets (GM); (2) Industry and Analysis (I&A); and (3) Enforcement and Compliance (E&C). GM combines ITA’s country and regional experts, a network of 100 U.S. Commercial Service offices nationwide and in more than 75 countries, and specific trade promotion programs to provide U.S. firms with the full suite of country-specific export promotion services and market access advocacy, while promoting the United States as an investment destination. I&A brings together ITA’s industry, trade, and economic experts to advance the competitiveness of U.S. industries through the development and execution of international trade and investment policies and promotion strategies. E&C enhances ITA’s responsibilities to enforce U.S. trade laws and ensure compliance with trade agreements negotiated on behalf of U.S. industry.
For More Information
For more information about The Trade Finance Guide, contact, via email at yuki.fujiyama@trade.gov, the author and project manager of the Guide, Yuki Fujiyama in ITA/I&A’s Office of Finance and Insurance Industries.
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