If you export goods, sooner or later you need someone else's money to ship an order. A buyer places a large purchase order, you need to pay your supplier, and your own cash is tied up in the last shipment. A bank or trade finance company can fund the gap, but only after it has checked your deal from several angles.
Knowing what they check helps in two ways. If you are the exporter, you can prepare your file so the answer is yes. If you are a buyer or a distributor about to commit to a new partner, the same checks are a good template for vetting that partner yourself. A lender is not trusting your story. It is verifying it, and so should you.
This guide walks through what financiers usually look at, in the order a file is normally reviewed. Each lender has its own rules, so treat this as the common ground and not a promise of any lender's decision.
The short answer
Before funding a trade deal, a lender wants to be confident of four things:
- The exporter can perform. You have the capacity, history and records to deliver the goods.
- The buyer will pay. The company on the other side is real, creditworthy and not a sanctions risk.
- The deal is genuine. The contract, price and documents agree with each other and make commercial sense.
- There is a way to get repaid. If something goes wrong, the lender has a second source of repayment.
Everything below is a way of testing one of these four points.
1. Who you are and whether you can deliver
A lender starts with the company asking for money. It wants to know who owns the business, how long it has been trading, and whether it has shipped this kind of product before. A track record in the same product and the same trade route counts for a lot. A company with a long, clean trading history is easier to fund than a newly formed one.
Expect to be asked for:
- company registration documents and proof of who owns the company
- tax registration
- financial statements, often for several years, and tax returns
- a business plan or at least a clear description of what you export and to whom
- information on existing debt and on money owed to you by other customers
Some government-backed programmes in different countries also set a minimum trading period, such as 12 months, before a business can apply. Check the rules of the programme you are applying to.
Lenders also look at your credit history and at how you have repaid past debts. If you have never borrowed, you can still build a case, but the transaction itself has to carry more of the weight.
2. Who your buyer is
For most trade finance, the buyer's ability to pay matters more than yours, because the buyer's payment is what repays the funding. So the lender checks the buyer as carefully as it checks you.
The usual buyer checks are:
- Legal identity. Is the full legal name registered, and does the address, ownership and tax number match official registries?
- Existence and reputation. Does the company have a real website, a real location and a real trading presence? Who runs it?
- Financial strength. Recent financial statements, credit reports and trade references.
- Payment and legal history. Does the company pay on time, and are there court cases, insolvency records or complaints?
- Sanctions and ineligible lists. Is the buyer, or anyone who owns or controls it, on a sanctions or debarment list?
How the buyer will pay also changes the lender's view. A confirmed letter of credit replaces the buyer's credit risk with the risk of the banks involved, so lenders treat it as the safest route. Documentary collections are riskier, and open account is the riskiest, which is why lenders usually want an established relationship with the buyer before funding it.
3. The contract and the order
The lender wants to see what was actually agreed. That means a purchase order or signed contract and a detailed pro forma or commercial invoice that sets out the price, the shipping terms, the payment terms, insurance and who pays which charges.
Two things get checked here. First, whether the contract is complete and allocates risk clearly between buyer and seller. Second, whether the price makes sense. Banks verify that the prices in the underlying contract are accurate, because a price far above or below the market is one of the classic signs of a fake or manipulated trade.
4. The documents
Documents are the evidence that the deal is real, and they are checked line by line. Typical documents include:
| Document | What the lender checks it for |
|---|---|
| Purchase order | That the buyer committed to buy, at what price, with what delivery terms |
| Commercial invoice | The goods, the amount, the payment terms and the amount to be financed |
| Packing list | The goods in the shipment, their quantity and weight |
| Bill of lading or air waybill | That the goods were dispatched, and to whom the title goes |
| Certificate of origin and export or import licences | That the goods can legally be exported and imported |
| Insurance certificate | That the shipment is covered |
| Inspection or quality certificates | That the goods match what was ordered |
The documents must agree with each other, and where a letter of credit is used, they must match its terms exactly. The bank will not pay until the documents comply. Descriptions that are unclear, coded or in a language the bank cannot read draw extra questions. Banks also check that a charter party is genuine when it appears in a shipping document, and that there is a clear arrangement for the bank to receive the title documents.
This is also where fraud shows up. Forged bills of lading, changed bank details and documents that look genuine but have one field altered are common problems in trade.
5. Sanctions, compliance and the goods themselves
Banks and finance companies must screen the parties in a trade transaction, and they continue to monitor after the funding starts. The checks include:
- screening the exporter, the buyer and related parties against sanctions lists
- screening the goods against trade policy and against UN Security Council resolutions
- for goods that could have a military use, checking whether a licence is needed and who the end user is
- looking at the route and the countries involved
This is why the same deal can be easy to fund on one trade route and difficult on another. Country risk, sanctions exposure and the strength of local banking all change the answer.
6. How you get repaid
Trade finance is normally repaid from the sale itself. The buyer pays, the lender takes its share first, and the rest goes to you. Because of that, lenders look at the whole route that money will take. They want a second source of repayment if the buyer does not pay, such as security over stock, receivables or other assets. Stronger deals need less. Weaker companies need a stronger transaction behind them, and the lender will then monitor the flow of goods, documents and money more closely.
Credit insurance is often the deciding factor. Some lenders will not finance foreign receivables unless they are covered by export credit insurance, and with cover they may advance a large share of the invoice value.
Why deals get declined
Most declined files fall into a few groups: a buyer that could not be verified, documents that do not agree with each other, a price that does not make sense, a high-risk country or route, no second source of repayment, or an exporter with no track record in that product. Notice that most of these are things you can fix before you apply.
How to get your file ready
- Put your company records, tax registration and financial statements in one place.
- Verify your buyer before the lender does. Registration, ownership, address, payment history and sanctions status.
- Get a clear written contract or purchase order with price, terms and delivery.
- Make sure every document agrees with every other document.
- Choose the payment method with the lender in mind. A confirmed letter of credit is easier to finance than open account.
- Ask about credit insurance for your buyer.
- Be ready to explain the route, the goods and any licences.
If you are the buyer or the distributor
The same list works the other way round. Before you pay a deposit to a new supplier, check that the company exists, that it has traded in the product it claims to sell, that its documents agree with each other, that it is not on a sanctions list and that its bank details are consistent. If a lender would ask for it, you should too.
Frequently asked questions
What do trade finance companies look at first?
Usually the buyer and the documents. They need to be sure the buyer is real and able to pay, and that the paperwork proves the goods exist and are going where the contract says.
Can a new exporter get trade finance?
It is harder, because a track record counts. A new exporter can improve its chances with a confirmed letter of credit, credit insurance on the buyer, a clear contract and a strong paper trail.
Why was my trade finance application declined?
Common reasons are an unverified buyer, documents that do not match, an unclear price or contract, a high-risk country, or no second source of repayment. Ask the lender which of these applied.
Do lenders check sanctions?
Yes. They screen the parties and the goods, and keep monitoring during the deal.
Does a letter of credit make financing easier?
Generally yes. A confirmed letter of credit replaces the buyer's credit risk with the risk of the banks, so lenders treat it as the safest route.
Written by Andre Biyog, ExporterIQ.
