Trade Finance: The Private Credit Powerhouse You Can’t Ignore

April 28, 2025

Trade Finance is a distinct proposition within the private credit asset class.

The private credit market is experiencing a remarkable expansion, reaching $2.1 trillion in assets under management as of December 2024, with projections from Moody’s indicating a potential rise to $3 trillion by 2028. This growth reflects a fundamental shift in the financial landscape, driven by regulatory changes and evolving investor preferences.

Within this dynamic asset class, trade finance emerges as a specialized segment, offering a unique proposition that warrants careful consideration. With a $2.6 trillion trade finance gap underscoring unmet global needs, trade finance combines the core strengths of private credit with distinct operational advantages.

This article delves into its rise, inherent benefits, associated risks, and broader market context, providing a balanced perspective for stakeholders navigating this highly regulated sector.

The Rise of Private Credit: A Transformative Trend

Private credit, defined as non-bank lending to businesses, has grown from a modest $250 billion in 2010 to $2.1 trillion today, a tenfold increase over 15 years, according to McKinsey’s 2024 Private Markets Review. This surge is rooted in structural changes following the 2008 financial crisis, where regulations like Basel III reduced bank lending capacity by approximately 25% in the U.S. since 1970, as noted by industry analyses. Concurrently, the market has attracted substantial capital, with $500 billion in dry powder available for deployment by Q3 2024, per Preqin. This liquidity has enabled private credit to surpass the $1.3 trillion high-yield bond market, providing an alternative financing avenue for businesses globally.

Trade finance, a subset of this market, focuses on supporting international trade through instruments such as invoice financing, supply chain finance, and factoring. It serves exporters and importers across diverse regions, including India, Singapore, Hong Kong, China, and beyond, addressing a critical need in a global trade environment valued at $32 trillion in 2022, per UNCTAD. The growth of trade finance mirrors private credit’s trajectory, driven by the same structural shifts and an increasing demand for tailored financial solutions to bridge financing shortfalls.

Trade Finance: Core Strengths Enhanced by Unique Features

Trade finance operates as a specialized form of private credit, facilitating the movement of goods and services across borders. It inherits the foundational attributes of private credit while introducing operational features that distinguish it within the asset class:

• Uncorrelated to Financial Markets: Trade finance is tied to the physical exchange of goods—such as garments from Bangladesh or auto parts from India—reducing its correlation with equity or bond market fluctuations.
• Diversification: Investments span multiple industries (e.g., textiles, aerospace) and geographies, mitigating concentration risk compared to traditional fixed-income portfolios.
• Risk-Adjusted Returns: Yields typically range from 7-11%, supported by collateral such as trade receivables or documentation, providing a balanced return profile, as indicated by industry benchmarks.

In addition to these shared benefits, trade finance offers distinct advantages:

• Short Durations: Transactions often range from 30 to 120 days, aligning with the cyclical nature of trade rather than the extended timelines of other private credit instruments.
• Regular Payouts: Cash flows are distributed monthly or quarterly, offering consistent returns to investors and supporting the working capital requirements of businesses.
• Liquidity: The rapid turnover of trade-related assets enhances portfolio flexibility, contrasting with the longer lock-up periods associated with private equity investments.

 

These characteristics position trade finance as a versatile component of private credit, particularly in the context of a $2.6 trillion trade finance gap, which has risen from $1.5 trillion pre-COVID. This gap predominantly affects small and medium-sized enterprises (SMEs), highlighting the segment’s potential to address critical financing needs in global trade.

Market Context: A Landscape of Opportunity and Challenge

The trade finance market’s scale is impressive, with global trade reaching $32 trillion in 2022, yet the $2.6 trillion financing gap underscores persistent challenges.

In Canada, 75% of micro-importers with 0-4 employees avoid international trade due to financing barriers, while 66% of importers identify rising shipping costs as a primary concern, according to CFIB’s 2023 survey. These costs have increased by 15% since 2017, adding pressure to importer cash flows. Similarly, the U.S. reported a $98.4 billion trade deficit in December 2024, with imports rising $3.8 billion to $260.3 billion, reflecting ongoing demand that strains financing resources.

Private credit, including its trade finance component, has responded to these dynamics. The market’s share of leveraged loan funding climbed to 86% in 2023 from 61% in 2019, per PitchBook LCD, with a notable portion supporting trade-related financing needs. This growth reflects a structural shift, as traditional banks scale back from riskier segments, creating opportunities for alternative lenders to innovate and address unmet demand.

Risks to Consider in Trade Finance

Trade finance presents a range of benefits, but it also carries inherent risks that require careful evaluation:

• Operational Risks: The reliance on manual, paper-based documentation processes can introduce delays, disputes, fraud risks as noted in industry discussions.
• Geopolitical and Supply Chain Disruptions: External events, such as the 2022 China lockdowns, resulted in trucking shortages and extended lead times, with lingering effects into 2023. Such disruptions can create uncertainty in short-term financing arrangements, particularly for importers reliant on specific trade routes.
• Collateral Dependency: The value of trade finance often depends on the quality of underlying assets, such as invoices or goods in transit. Any decline in asset value due to buyer insolvency, shipment delays, or quality issues could pose challenges to expected returns.
• Regulatory Compliance: Operating in a highly regulated sector, trade finance participants must navigate complex international trade laws, anti-money laundering requirements, and sanctions, which can increase operational costs and require robust compliance frameworks.
• Interest Rate Sensitivity: Approximately 80% of private credit loans, including those in trade finance, are structured with floating rates. This exposes participants to potential increases in borrowing costs, particularly in environments of rising interest rates, which can impact profitability for importers and exporters with limited margins.

 

These risks vary by transaction and market condition. The short duration and regular payouts of trade finance may mitigate some exposures, while credit insurance or diversified portfolios can serve as risk management tools. Stakeholders are encouraged to conduct thorough due diligence to assess the suitability of these factors within their investment or operational strategies.

Drivers Behind the Rapid Growth

Several key forces are propelling trade finance’s ascent within the private credit landscape:

• Regulatory Constraints on Banks: Post-2008 regulations, such as Basel III, have diminished bank willingness to engage with SME and trade-related lending. Private credit, including trade finance, offers an alternative, with 4-6 week deal closures compared to banks’ typical 8-12 weeks, addressing the need for rapid financing solutions.
• Investor Demand for Yield: In an environment where traditional bond yields average 4%, investors seek higher returns. Trade finance’s 7-11% yields, supported by short-term assets, attract institutional capital, bolstered by $500 billion in dry powder available for deployment.
• Unmet Trade Financing Needs: The $2.6 trillion gap reflects a persistent shortfall, driven by extended payment terms (e.g., 90-120 days) and rising operational costs. Trade finance’s flexibility, including options for quick fund disbursement, aligns with the evolving requirements of global trade participants.
• Technological Advancements: The adoption of digital platforms has streamlined trade finance processes, reducing paperwork and enhancing efficiency. This technological edge supports the segment’s growth by addressing historical bottlenecks in transaction speed and transparency.

 

These drivers collectively underscore trade finance’s role as a responsive and adaptable component of the private credit market.

Broader Implications and Strategic Considerations

The rise of private credit, with trade finance as a pivotal element, signals a transformative shift in global finance. This asset class delivers uncorrelated returns, diversification, and risk-adjusted yields, complemented by short durations, regular payouts, and liquidity—attributes that set trade finance apart within the private credit framework. The market’s growth is underpinned by a $2.6 trillion trade finance gap and a $98.4 billion U.S. trade deficit in December 2024, highlighting both the opportunity and the challenge inherent in this space.

For investors, the appeal lies in the potential for stable returns within a diversified portfolio, though risks such as interest rate sensitivity and currency volatility require careful management. For businesses—exporters and importers alike—trade finance offers a means to navigate cash flow constraints and operational complexities, particularly in regions facing geopolitical or supply chain challenges. The segment’s growth is further supported by technological innovation, which promises to enhance accessibility and efficiency over time.

Stakeholders in this highly regulated sector must approach trade finance with a clear understanding of its benefits and risks. The data suggests a robust upward trajectory, driven by regulatory shifts, investor demand, and the persistent need for trade financing solutions. As global trade continues to evolve, trade finance presents a strategic consideration, offering a pathway to address these dynamics with informed and measured engagement.