1. The instruments
Trade finance uses a set of documents whose function is to give a financier or a paying party control over the goods and evidence of the transaction.
2. The bill of lading as security
The bill of lading is a document of title in the case of an original bill.
That is what makes it the security instrument at the centre of trade finance: possession of the endorsed bill controls the goods.
A sea waybill is not a document of title, so it provides no documentary security.
3. The letter of credit documents
A credit names:
The commercial invoice.
The bill of lading, in the specified form.
The packing list.
The certificate of origin, in the specified form.
Inspection certificate, where required.
Insurance document.
Beneficiary’s certificate, for statements.
The documents are examined strictly against the credit’s terms.
4. The documentary collection documents
The seller ships and provides the documents to its bank, which forwards them to the buyer’s bank for release against payment or acceptance.
The documents: the invoice, the bill of lading (consignee to order of the seller, endorsed to the collecting bank), the packing list, the certificate of origin, and any product certificates.
The bill of lading is consigned to order of the seller and endorsed to the bank, which controls release.
5. The banker’s acceptance and the draft
The draft is the payment instrument in a collection or a credit.
The draft is drawn by the seller on the buyer (or on the issuing bank under a credit), and the acceptance by the drawee creates a negotiable obligation which can be discounted.
The draft references the invoice and the shipment.
6. The receivables finance documents
Where the seller finances the receivable:
The invoice, assigned to the financier.
Proof of delivery, which is usually the signed bill of lading or a proof-of-delivery document.
The evidence of the receivable’s existence, which the buyer may confirm.
7. The China angle
Chinese exporters using export receivables finance in China use the export invoice and the customs declaration as evidence.
The declaration is the Chinese customs record of the shipment. Banks use it to verify the export’s existence.
This is a document that does not exist in other jurisdictions’ trade finance practice and is central in China.
8. The legalization question
Some credits require legalized documents, which puts the legalization cycle inside the presentation period.
Some banks in certain destinations require a legalized invoice or a legalized certificate of origin as a matter of internal policy.
Where that applies, the legalization timeline has to be inside the financing timeline.
9. The common discrepancies
Presentation after the credit’s expiry.
Presentation after the presentation period.
Documents inconsistent with the credit’s terms.
Bill of lading not covering the whole voyage.
Insurance dated after the shipment.
Certificate of origin in the wrong form.
Values differing across documents.
10. Closing view
Trade finance works by turning a shipment into a set of documents that a third party can rely on.
Every document in the set exists to support a specific reliance, and a document that does not do so exactly is a discrepancy rather than a formality.
*This article is based on documentary credit and documentary collection practice. Traders should consult their bank on specific transactions.*