A guide to key resources: trade finance

Practical Law UK Practice Note Overview 6-500-4429 (Approx. 16 pages)

A guide to key resources: trade finance

by Practical Law Finance

Introduction

This note acts as a guide to Practical Law Finance's resources on trade finance. Trade finance covers a broad range of financing arrangements to facilitate one or more of the production, export and sale of goods.

Trade finance overview

Trade finance transactions can be straightforward or complex, ranging from the issue of a letter of credit (documentary credit) to ensure a seller is paid under a contract for the sale of goods to a structured financing involving a secured syndicated facility to finance the production, export and sale of a commodity to buyers around the globe.

The Incoterms® Rules apply to many different types of trade finance transactions. For an overview of the Incoterms® Rules, see Practice note, The Incoterms® Rules: overview of key terms.

Traditionally, trade finance transactions have been very document intensive. Efforts are underway to modernise trade finance transaction by using more digital resources. For more information on these initiatives, see Practice note, Trade finance: the digital age (Sectors only).

Documentary letters of credit

Documentary letters of credit are used to ensure payment under a sale of goods contract in a cross-border context.

Letters of credit: overview

For an overview of documentary letters of credit used for payment, see Practice note, Letters of credit: overview. The note explains:

The nature and function of letters of credit.
The roles a bank can take in a letter of credit transaction.
The ways in which a letter of credit may provide for payment.
The different types of letter of credit that may be issued.
The relevance of the UCP 600, a set of contractual rules which are frequently incorporated by express agreement into a letter of credit.
The key matters buyers, sellers and banks should consider when entering into a letter of credit transaction.

Letters of credit: UCP 600

For detailed information on the UCP 600, see Practice note, UCP 600.

Letters of credit: standard documents and drafting notes

For a letter of credit, see Standard document, Letter of credit with integrated drafting notes.
For a specimen clause to be inserted into a contract for the sale of goods between a buyer and a seller, providing for the payment of the goods by letter of credit, see Standard clause for payment for goods by letter of credit with integrated drafting notes.

Bonds, guarantees and standby credits

A variety of instruments are used to secure payment or performance in trade finance and other commercial transactions, including bonds, guarantees and standby letters of credit (standby credits).

Bonds, guarantees and standby credits: overview

For an overview of bonds, guarantees and standby credits, see Practice note, Bonds, guarantees and standby credits: overview. The note explains:

The function of and differences between bonds, guarantees and standby credits.
The issues about which buyers, sellers and issuers or guarantors of these instruments should be aware.
The use of the International Chamber of Commerce (ICC) Uniform Rules, including the use of the following in relation to standby credits:
- UCP 600;
- International Standby Practices (ISP98); and
- Uniform Rules for Demand Guarantees (URDG 758).

Demand guarantees: URDG 758

For a note on the ICC Uniform Rules for Demand Guarantees 2010 revision, ICC Publication No. 758, which came into force on 1 July 2010, see Practice note, URDG 758.

Guarantees and indemnities

For a note covering legal and drafting issues relating to guarantees and indemnities, see Practice note, Guarantees and indemnities.

Bonds, guarantees and standby credits: standard documents and drafting notes

For an on demand performance bond, see Standard document, On demand performance bond with integrated drafting notes.
For a default performance bond for a construction project with integrated drafting notes, see Standard document, Bond: default performance bond for a construction project.
For an on demand bid bond (also called a tender bond or tender guarantee) with integrated drafting notes, see Standard document, On demand bid bond.
For an on demand advance payment bond (also called an advance payment guarantee), see Standard document, Advance payment bond.
For an all monies guarantee, see Standard document, Guarantee and indemnity: corporate guarantor, all monies with integrated drafting notes.
For an all monies guarantee given by one or more corporate guarantors over obligations owed by multiple obligors, see Standard document, Guarantee and indemnity: cross-guarantee, corporate guarantors, all monies with integrated drafting notes.
For a specific liabilities guarantee, see Standard document, Guarantee and indemnity: corporate guarantor, specific liabilities with integrated drafting notes.
For a standby credit, see Standard document, Standby letter of credit with integrated drafting notes.

Structured trade finance transactions

In a typical structured trade finance transaction, a secured loan is extended to a producer or seller of goods to finance the production of those goods or for working capital purposes. The transaction is structured so that the proceeds of sale of the goods are applied to repay the loan.

Types of structured trade finance transactions

Structured trade finance transactions come in a variety of shapes and sizes. Some of the more common structures are listed below:

Pre-export and prepayment finance

A pre-export finance (PXF) structure is frequently used to mitigate risk when lending to a borrower that produces or sells goods. It involves a secured loan being made to a borrower (often operating in a higher risk or developing market) to be repaid directly from the cashflow generated through the sale of those goods or commodity. Security is typically taken over the borrower's rights under the export contract(s) with the buyer of the goods or commodity, and the collection account where amounts under the export contract(s) must be credited.

Prepayment finance is a type of export finance which bears a number of similarities to a loan made under a PXF structure. The fundamental difference between the two is that in a PXF structure the loan is made to the producer of the goods or commodity, while in a prepayment finance structure, the purchaser of the goods or commodity is the borrower and uses the loan proceeds to pay the producer for their production.

For more information on PXF, including the structure of a typical PXF transaction, key documents involved, the security package, and mitigation of transaction risks, see Practice note, Pre-export finance.
For more information on prepayment finance, see Practice note, Pre-export finance: Prepayment finance.
For a term sheet relating to a syndicated PXF loan facility, see Standard document, Term sheet: syndicated term loan, pre-export finance facility.
For a diagram of a PXF and a prepayment transaction, see Deal structures: Pre-export finance and Prepayment finance.

Warehouse financing

Warehouse financing is a means of enabling a producer or trader of goods or commodities to raise secured finance against a quantity of goods stored in a warehouse. Warehouse financing structures can range from simple and easily implemented structures to more complicated ones. It is a particularly useful means for a small producer or trader in a developing country to raise critical working capital.

For an explanation of the key elements of a warehouse financing structure, the principal parties and the typical security arrangements, as well as, the key issues to consider when entering into a warehouse financing transaction, see Practice note, Warehouse financing: overview.

Borrowing base facilities

A borrowing base facility is a type of working capital facility. It is structured such that the amount which the borrower may borrow from time to time is linked to the value of a fluctuating pool of assets. This pool of assets is known as the 'borrowing base'.

Borrowing base facilities are a type of trade finance and are typically provided to producers of commodities (such as metals or agricultural commodities) which are engaged in the processing of raw materials into finished products. They can also be made available to traders or distributors of commodities, although this is less common.

For an explanation of the key elements of a borrowing base facility, including its typical structure, the security package, and other issues to consider when entering into a borrowing base facility, see Practice note, Borrowing base facilities.

Export credit agency finance

Export credit agency (ECA) finance is a general term given to transactions where the export trade agencies of individual countries lend their financial support to the export of eligible capital goods and related services originating from their home jurisdiction. ECA finance is a particular form of trade finance, which offers benefits to exporters and to foreign buyers. What distinguishes ECA finance from other forms of trade finance is that the risks associated with financing exports to a foreign buyer are alleviated through the obligations assumed by an ECA.

For more information, see the following practice notes:

Export credit agency finance: overview, which explains the key elements of ECA covered finance, the nature and operation of ECAs, the types of risk covered, and the claims and recovery process.
Export credit agency finance: types of cover, which explains the structure of the two most common forms of export credits to which ECA cover applies, namely buyer credit and supplier credit. It also considers direct lending by ECAs.
Export credit agency finance: key documents and terms, which considers the key documents (such as the application for cover, the ECA support document, and the facility agreement), as well as key ECA support terms and facility agreement terms in relation to an ECA buyer credit facility.

Trade receivables securitisation

A securitisation of trade receivables consists of the sale of the receivables by a company (seller or originator) to a financing vehicle (purchaser SPV) that is funded by loan facilities, the direct or indirect issuance of term debt in the capital markets or a mixture of both. It can be a relatively cheap and efficient way for corporates to raise working capital. Historically trade receivables securitisations have performed well and, in some transactions, the revolving period has continued for over a decade.

For an overview of trade receivables securitisation, which includes a description of some of the key legal and commercial considerations that influence the structuring of a typical transaction, see Practice note, Trade receivables securitisation.

Forfaiting

Forfaiting is a type of trade finance. In a typical forfaiting transaction, a series of negotiable instruments (such as bills of exchange or promissory notes) are bought from a company (the seller) by a finance company (the forfaiter) on a non-recourse basis in exchange for cash. For an introduction to forfaiting, see Practice note, Forfaiting.

For a diagram showing a typical forfaiting structure, see Deal structure: Forfaiting.
For information on promissory notes, see Practice note, Promissory notes: overview.
For a standard form promissory note with integrated drafting notes, see Standard document, Promissory note.

Factoring and invoice discounting

Factoring and invoice discounting are receivables financings which involve quasi security structures. They are ways to raise short-term finance which involve a company selling its book debts and other receivables due from its customers at a discount to a finance company for immediate cash to provide working capital. For an introduction to factoring and invoice discounting, see Practice note, Factoring and invoice discounting.

For a diagram showing a typical factoring structure, see Deal structure: Factoring.
For a diagram showing a typical invoice discounting structure, see Deal structure: Invoice discounting.

Islamic finance

Murabaha is a popular method of Islamic finance frequently used in trade finance arrangements. In a typical murabaha transaction, banks will buy the asset in question from the supplier (either directly or through an agent) and then sell it to the customer at an agreed marked-up price. In a reverse murabaha (tawarruq) structure, rather than retaining the asset for use in its business, the customer sells it, either back to the original supplier or to a third party.

For an introduction to Islamic finance, see Practice note, Introduction to Islamic finance.
For an introduction to murabaha, see Practice note, Islamic finance: UK law overview: Murabaha.
For a diagram showing a typical murabaha structure, see Deal structure, Islamic finance - Murabaha.
For a diagram showing a typical reverse murabaha structure, see Deal structure, Islamic finance - Reverse murabaha (tawarruq).

For a guide to our additional materials on Islamic finance, see Practice note, A guide to key resources: Islamic finance.

General materials for structured trade finance transactions

Loan facilities

For an introduction to the common types of corporate loan facilities which could be adapted for use in a trade finance transaction, see Practice note, Corporate loan facilities: a quick guide.
For a term sheet for a syndicated secured term loan for financing the production of commodities by the borrower, see Standard document, Term sheet: syndicated term loan, pre-export finance facility.
For an overview of Practical Law Finance's resources on lending, see Practice note, A guide to key resources: general lending.

Legal opinions

Legal opinions are often obtained before loan facilities are made available.

For an overview of the matters to consider when issuing an English legal opinion, see Practice note, Legal opinions in finance transactions: overview.
For a checklist of matters to consider when obtaining a foreign legal opinion in connection with a secured loan where the party providing the security is incorporated outside England and Wales, see Checklist, Contents of a foreign legal opinion on security.

Taking security over assets in structured trade finance transactions

General

For an overview of Practical Law Finance's resources on security and quasi security arrangements, see Practice note, A guide to key resources: security and quasi-security.

Forms of security that can be taken over assets

For an outline of the options available to lenders when taking security, see Practice notes, Taking security and Charges: a quick guide

Of particular interest in structured trade finance transactions, see:

Perfection and priority of security

For an introduction to the different methods of perfecting security, the basic rules governing priority and contractual ways in which the rules can be varied, see Practice note, Perfection and priority of security.

Cross-border security

For an overview of the issues that need to be considered when taking security over a foreign asset or from a foreign entity, see Practice note, Taking cross-border security.
For a checklist of matters to consider when instructing foreign lawyers in relation to taking security, see Checklist, Instructing foreign lawyers on security.
For information on choosing a governing law in a cross-border context, see Practice note, Choosing a governing law in finance transactions.
For a multi-jurisdictional guide to taking security, see Finance Global Guide.

Assigning and charging: standard documents and drafting notes

In a structured trade finance transaction involving a secured loan to the seller, the seller may grant the lender security over the seller's rights under the contract for the sale of goods and over the monies credited to a bank account (known as the collection account) following the sale of the goods in question.

For a clause that allows either party to a commercial contract to assign the benefit of it, see Standard clauses, Assignment and other dealings.
For a standard form security assignment of contractual rights, created by a company incorporated in England and Wales in favour of a single corporate lender, see Standard document, Security assignment of contractual rights which includes integrated drafting notes.
For a form of charge in favour of a lender over monies held in a corporate borrower's bank account, see Standard document, Charge over bank account which includes integrated drafting notes.

Tax

Tax issues for finance lawyers

For a summary of the tax issues that frequently arise in respect of commercial lending transactions, see Practice note, Tax for banking lawyers.

Withholding tax

For a summary of the UK withholding tax rules on payments of interest and certain other payments, see Practice note, Withholding tax.

Global guide to taxes

For a multi-jurisdictional guide to taxes on corporate transactions and finance transactions, see Tax on Transactions Global Guide.

Insurance

Goods sold for export are customarily insured against the perils of the journey. In a structured trade finance transaction involving a secured loan to the seller, the seller may grant the lender security over the seller's rights under the insurance policy. For a note which explains the various doctrines and principles concerned with insurance, including what constitutes an insurable interest, subrogation, joint insurance, double insurance and noting, see Practice note, Insurance contract law: general principles.

For a guide to Practical Law's UK and multi-jurisdictional insurance materials, see Insurance collection page. In addition, for additional information on the insurance and reinsurance sector, see our insurance sector page.

Some trade finance transactions may use credit insurance to mitigate perceived risks. For more information on credit risk insurance, see Practice note, Credit risk insurance: overview.

Cross-border restructuring and insolvency

The potential implications of insolvency law should be recognised when advising on trade finance transactions. The following resources provide an overview of various insolvency procedures.

For a multi-jurisdictional guide to restructuring and insolvency, see Restructuring and Insolvency Global Guide.
For background information on the international aspects of insolvency, see Practice note, Cross-border insolvencies.

Links to Practical Law resources on trade finance

Practical Law Finance resources on trade finance

Links to Practical Law Finance resources on trade finance can be found on our Trade finance topic page.

Related Practical Law resources

Links to Practical Law services covering key practice areas relevant to trade finance transactions include:

Practical Law Commercial, see in particular the topic Supply of Goods and Services.
Practical Law Finance, see in particular the topics Lending: General, Security and Quasi Security and Islamic Finance.
Practical Law Tax.

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A guide to key resources: trade finance | Practical Law