From LCs to Platforms: Understanding Trade Finance Boundaries

 

Trade finance has long been the lubricant of international commerce, reducing payment risks and bridging financing gaps between buyers and sellers separated by geography, jurisdiction, and trust. For centuries, traditional instruments such as letters of credit, bills for collection, and bank guarantees have underpinned cross-border transactions by ensuring that exporters receive payment and importers receive goods under agreed terms. These instruments, designed to mitigate transactional risk, continue to dominate trade flows in emerging markets such as Bangladesh, where letters of credit cover more than 80 percent of imports. Yet, in recent decades, the rise of supply chain finance (SCF) has introduced an entirely new dimension, shifting the focus from transaction-by-transaction risk mitigation to systemic cash-flow optimization across global value chains. While both belong to the broader universe of trade finance, they are not the same. SFC is only a subset of trade finance, with distinct boundaries and objectives, and understanding this distinction is critical for policymakers and market participants alike.

Traditional trade finance is fundamentally risk-driven. It emerged from a world where trust was limited, information was asymmetric, and the role of banks was to stand in the middle as guarantors of payment and delivery. The letter of credit, in particular, became the gold standard, with banks promising exporters that they would be paid as long as documents conformed to the credit terms. Documentary collections and demand guarantees complemented this architecture. The strength of this model is its ability to assure exporters of payment even when the importer’s creditworthiness is uncertain, and to assure importers of delivery without upfront cash outflow. It remains deeply relevant, particularly in markets where legal enforcement is weak and trading partners lack longstanding relationships.

SFC, by contrast, grew out of the globalization of production networks, where multinational corporations and large buyers extended their supply chains across dozens of countries and thousands of smaller suppliers. The problem here was not necessarily the risk of fraud or non-payment, but the imbalance of bargaining power. Large buyers often demanded long payment terms - sometimes 90 or 180 days - while small suppliers needed immediate liquidity to continue producing. SFC introduced solutions such as payables finance (reverse factoring) and receivables discounting, where banks or platforms would provide early payment to suppliers based on the buyer’s stronger credit profile, or purchase invoices from suppliers at a discount. Unlike the letter of credit, which focuses on one shipment, SFC creates ongoing liquidity management for entire networks of trade relationships.

The boundary between the two becomes clear when we examine empirical experiences. In Europe and North America, SFC programs now account for hundreds of billions of dollars, with platforms like PrimeRevenue and Demica supporting global corporations in optimizing working capital. Factoring and invoice discounting are deeply embedded in markets like Italy, Spain, and China, where suppliers routinely sell their receivables for instant cash. In contrast, instruments like letters of credit have steadily declined in those regions, used primarily in higher-risk emerging market trades. The distinction lies in purpose: traditional trade finance ensures payment security and trust between unknown parties, while SFC ensures liquidity and cash-flow stability between known parties in long-term relationships. Both coexist, but they serve different needs.

Bangladesh provides an illuminating case study of how these two worlds intersect yet remain distinct. The country’s trade finance ecosystem is still heavily dependent on letters of credit, reflecting its status as a frontier market with limited trust between foreign buyers and local suppliers, as well as between local importers and overseas sellers. For the readymade garments industry, which exports primarily under open account terms demanded by global brands, receivables financing has begun to emerge in a modest way. Some international buyers have introduced payables finance programs for Bangladeshi suppliers, allowing them to receive early payment at a discount. However, the scale remains limited compared to the overwhelming dominance of LC-backed transactions, particularly on the import side, where banks and regulators still prefer the security of established documentary practices.

This is where an interesting hybrid instrument, the UPAS letter of credit, enters the discussion. UPAS (Usance Payment at Sight) LCs allow importers to defer payment for a set period, such as 90 or 180 days, while exporters receive immediate payment at sight, funded by the discounting bank. From the exporter’s perspective, this resembles a receivables finance transaction: they ship goods and are paid promptly. From the importer’s perspective, it functions like short-term working capital financing, as they receive goods without immediate cash outlay. UPAS thus combines elements of traditional trade finance—structured within the legal and operational framework of an LC—with the cash-flow advantages typically associated with SFC. It has become particularly popular in Asian markets, including Bangladesh, as it satisfies regulatory comfort with LCs while delivering financing benefits to both sides of the transaction.

Yet, despite this overlap, UPAS remains fundamentally a trade finance instrument rooted in LC structures rather than a true SCF program. The financing still revolves around a single shipment and the discounting of specific documents, rather than an ongoing platform managing dozens of supplier relationships. Its availability depends on the importer’s bank lines and regulatory approval, not on an integrated supply chain platform. This is precisely where the boundaries between trade finance and SCF matter: while UPAS can mimic some features of SCF, it cannot substitute for systemic receivables or payables finance programs that connect entire tiers of suppliers to financing through technology.

Globally, empirical evidence shows that SCF is thriving where digital platforms are strong and regulatory frameworks support open account trading. China has developed vast receivables finance markets, with fintech platforms intermediating billions in discounted invoices. Europe has harmonized factoring laws, allowing SCF to expand rapidly. In the United States, corporates increasingly turn to SFC to improve working capital ratios and strengthen supplier resilience. But in emerging markets, including Bangladesh, adoption has been slower. Banks remain LC-centric, regulators are cautious about off-balance-sheet exposures, and suppliers lack familiarity with digital platforms. As a result, SCF penetration is low, and hybrid tools like UPAS LCs step in as a compromise.

For Bangladesh, the challenge is therefore twofold. On the one hand, traditional trade finance remains indispensable, as long as exporters and importers operate in an environment of limited trust and regulatory caution. On the other, the country cannot afford to remain outside the global shift toward SFC, especially as its export industries become more integrated into multinational value chains that increasingly operate on open account terms. Policymakers and banks must recognize that not all trade finance is SFC, but also that Bangladesh needs both. The boundaries are real, but so are the complementarities.

The way forward requires a dual approach. Regulators should continue to support instruments like UPAS LCs, which bridge the gap and provide comfort to banks while easing cash-flow pressures for corporates. At the same time, they should create enabling environments for SCF platforms, both domestic and international, to operate in Bangladesh. This means clarifying legal treatment of receivables, ensuring enforceability of digital documents, and encouraging banks to collaborate with global platforms such as Marco Polo, Contour, and Komgo. For exporters, particularly in garments, integration into buyer-led payables finance programs can reduce dependence on costly pre-shipment loans. For importers, SCF can eventually reduce reliance on deferred payment LCs, allowing them to access cheaper liquidity through buyer-approved payables finance. The balance will not shift overnight, but the direction is inevitable.

The distinction between traditional trade finance and SFC must be clearly understood, not blurred. Not all trade finance is SCF, and not all SCF instruments can replace the security of LCs. The global experience demonstrates that the two coexist, each serving different functions. Bangladesh must navigate this duality carefully, leveraging UPAS and other hybrid instruments in the short run, while gradually building the legal and technological infrastructure for true SFC. By doing so, it can ensure that its trade ecosystem remains both secure and competitive, bridging the needs of today with the demands of tomorrow.


Mehdi Rahman works in the development sector. He also
writes on foreign trade
and monetary issues.