No, it is not OK. If you’re waiting to be paid for a shipment of goods you sent off to a distant customer who has promised to pay on delivery, and you are a small firm that is strapped for cash, it is not OK. Neither is it OK when you are a small firm trying to import a raw material, and you’re asked for payment in advance, before you even have a chance to make something out of the goods by selling them (for, hopefully, a profit). You would much rather issue a letter of credit, promising payment later.
This is where trade finance comes in. Under trade finance, the European Investment Bank may guarantee for example letters of credit and advance payment bonds issued by banks to small- and medium-sized businesses (SME’s).
One example of such a project is our Trade Finance Facility 2, worth EUR 400 million, signed last year in Greece, assuring overseas customers and partners of Greek companies that their financial commitments will be met. Trade finance can also reduce risks relating to exchange rate fluctuations, political difficulties from trading with counterparties in certain countries, dangers involved in transportation, and many other situations where the goods or the payment may end up “lost.” More than 90% of trade transactions involve some form of credit, insurance or guarantee.
Trade finance is another example of the financial assistance the EIB provides, through banks and other financial intermediaries, to SME’s and mid-caps. In fact, this is the largest part of our business, with EUR 29.6 billion in 2017, reaching approximately 285 800 firms that employ close to 4 million people. The reason we prioritise lending to smaller firms is that they make up the majority of economic activity in the EU, and it is these relatively smaller firms that most often face hindrances in getting financing. Our weekly cartoon, The Brood, tries to illustrate some of those challenges.