1. Conceptual Framework of Export Financing 1.1. Introduction The expansion of trade depends on reliable, adequate, and cost-effective sources of financing, both long-term (for capital investment needed to produce tradeable goods and services) and short-term, in particular trade finance. 1 The trade finance market has several segments according to maturity, from short-term (usually 0 to 180 days, but possibly to 360 days) to medium and long-term. The medium to longterm end is generally considered to be over two years, and is subject to the OECD Arrangement on Guidelines for Officially Supported Exported Credits (the Arrangement) when insured or guaranteed by a Participant to the Arrangement. The latter is the basis on which the large majority of world trade operates, as there is generally a time-lag between when goods are produced, then shipped and finally when payment is received. Trade-finance can provide credit, generally up to 180-days, to enterprises to fill this gap. The availability of trade finance, particularly in developing and transition countries, plays a crucial role in facilitating international trade. Exporters with limited access to working capital often require financing to process or manufacture products before receiving payments. Conversely, importers often need credit to buy raw materials, goods and equipment from overseas. The need for trade finance is underlined by the fact that competition for export contracts is often based on the attractiveness of the payment terms offered, with stronger importers preferring to buy on an open account basis with extended terms as compared to stronger exporters who prefer to sell on a cash basis, or secured basis if extended terms are needed. A number of common trade financing instruments have been developed to cater to this need. In addition to securing adequate finance, exporters face a number of additional risks including non payment by the buyer or importer for insolvency or political reasons, as well as foreign exchange fluctuation (FX) risk. In developed countries and some developing and transition countries, insurance provided by export credit agencies (ECAs) on behalf of the state (official export credit) or by private sector insurance companies can cover non payment risks, while banks can help with other risks.
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Improving the Availability of Trade Finance during Financial Crises http://www.wto.org/english/res_e/booksp_e/discussion_papers2_e.pdf
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