Trade Finance Instruments
The Essential Tools That Move Goods and Mitigate Risk in Global Trade
Trade finance relies on a set of core instruments to unlock working capital, secure performance, and mitigate counterparty risk. From small traders to multinationals, these tools remain central to global commerce. Here are the five most widely used instruments in trade finance—and how FG Capital Advisors supports their structuring and execution.
1. Letter of Credit (LC)
A letter of credit is a payment commitment issued by a bank, triggered by the presentation of compliant documents. It protects the exporter by ensuring payment if the buyer defaults and is used heavily in cross-border transactions where trust or legal recourse is limited.
2. Bank Guarantee (BG)
A bank guarantee assures one party that the bank will fulfill the financial obligations if the counterparty fails to perform. These are used for bid bonds, performance guarantees, and payment risk mitigation in capital projects or commodity trades.
3. Export Credit Insurance
This insurance covers the exporter against non-payment from buyers due to insolvency, default, or political interference. It's issued by private insurers or ECAs, enabling safer trade on open account terms and supporting financing by de-risking receivables.
4. Receivables Finance
Often referred to as factoring or invoice discounting, this involves advancing funds against outstanding invoices. It helps exporters unlock cash quickly and strengthens working capital cycles.
5. Pre-Export Finance
This facility provides upfront funding against confirmed purchase orders or export contracts. Typically secured by collateral, it’s critical in commodity trades where producers need capital to process and ship goods.
How FG Capital Supports These Instruments
FG Capital Advisors works across all five instruments—structuring transactions, preparing lender-grade credit files, and distributing them through our global trade finance network. Whether you're seeking LC issuance support or looking to underwrite a structured repo facility, we assist at every step.
Explore our structured trade finance guide or learn about our Trade Finance Fund for exposure to a professionally underwritten credit strategy.
Frequently Asked Questions
What’s the difference between an LC and a BG?
An LC guarantees payment when conditions are met (documents submitted), while a BG serves as a fallback if a party fails to perform or pay.
Can these instruments be combined?
Yes. For complex trades, LCs can be paired with insurance or a guarantee for added protection.
Do these tools require collateral?
In most cases, yes—banks require collateral, security packages, or counter-guarantees before issuance.
Does FG Capital issue these instruments directly?
We underwrite the transaction and match it with banks, funds, or insurers from our global network who can issue or finance against these instruments.
