Trade Finance: A new asset class coming to DeFi via Tinlake
Trade Finance: An essential element of global trade
“Some 80 to 90 percent of world trade relies on trade finance (trade credit and insurance/guarantees), mostly of a short-term nature.” — WTO
Most of us don’t spend too much time thinking about supply chain logistics or international trade. But when it comes to toilet paper arriving at the shelves of a supermarket around the corner, a lot of coordination between many counterparties has to happen. The glue that sticks all these pieces together? Money, and particularly trade finance. We, as consumers, wouldn’t see the ease of access to our daily products without this financial concept: needless to say, this asset class is a staple in global trade.
Trade finance is the financial products used to facilitate international trade and commerce. A third party is introduced to remove risk between buyers and suppliers.
In the case of DeFi, the Asset Originator is the third party component that takes on the risk between the buyer and supplier.
Counterparties
Buyer: Entity requesting trade finance
Asset Originator (Trade finance company): Negotiates and implements terms for trade finance between buyer and supplier
Supplier/Manufacturer: Manufacturer of the goods the buyer wants; often requires upfront payments to begin manufacturing.
Freight Forwarders: Responsible for the operation of international transport.
How it Works
The three most important players are the Buyer, Supplier, and Asset Originator:
Risks Involved
There are two major risks involved in trade finance that investors should always ask about:
1. Risk of Loss or Damaged Goods
In most cases, loss or damage goods are covered by some sort of insurance. Loss of goods or delayed delivery inflicted costs are normally covered by the Buyer. In case the delivered goods have been damaged during transit, costs are covered by goods-in-transit insurance. This is usually sorted between the Buyer and Shipper, depending on the transaction terms.
2. Risk of Defectiveness of Goods
Always make sure someone is liable in the case that the shipper delivers defective goods. In most cases, the Buyer will be the one held responsible for this.
Trade Finance Meets DeFi
Trade finance normally operates on rolling dates, which makes static financing difficult. With DeFi, continuous revolving pools will make financing between buyers and suppliers much easier.
Revolving pools allow asset originators to continuously originate loans. So, as investors extend credit lines to the asset originator, and the asset originator repays, the asset originator can mint more trade finance invoices.
What to Expect from a Trade Finance Pool
- Duration: Short-term trade finance (range 30–120 days)
- Counterparty: Buyer
- Collateral: Trade Finance Receivables
Say Hello to our Trade Finance Friends
Two Asset Originators are working with Tinlake now and are involved in trade finance. You can learn more about these originators at tinlake.centrifuge.io.
Harbor Trade Credit
Harbor is a fintech firm focused on Supply Chain Finance (SCF) and working capital solutions. Harbor’s solution allows for early payments to suppliers so that buyers can optimize their own liquidity through trade credit. Read more about them on our discourse.
ConsolFreight
ConsolFreight is a SaaS freight technology provider that empowers the digital transformation of the shipping industry. ConsolFreight finances freight forwarder invoices as well as the cargo being transported. Look at the latest pool spinning on Tinlake.
Interested in Tinlake’s DeFi pools? Visit https://tinlake.centrifuge.io/
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