Corporate treasurers can use several trade finance instruments to manage payment risk, support supplier relationships, and release working capital. The difficult part is deciding which structure fits the transaction. 

A promissory note, bill of exchange, and letter of credit each create a different legal and operational framework. An open account is also an important comparator, although it is a payment arrangement rather than a negotiable instrument. The right choice depends on the objective, obligor, funding route, documentation, and governing law. 

Choosing trade finance instruments 

Start with the problem, not the product. Is treasury trying to strengthen payment assurance, accelerate receivables, preserve buyer liquidity, settle suppliers earlier, or create an obligation that a funder may be willing to finance? 

Four questions help narrow the options: 

• Who is the payment obligor? Identify who must pay and whose credit risk will be assessed. 
• What is the funding route? Can the obligation be transferred or discounted, or is separate financing needed? 
• What operational work is required? Consider issuance, acceptance, presentation, transfer and settlement. 
• Which law applies? Confirm that the paper or electronic format is recognised in each relevant jurisdiction. 

If the priority is releasing cash, ETR Digital’s cash conversion cycle calculator can help identify whether receivables, payables or inventory is creating the greatest constraint. 

Trade finance instruments comparison 

When a promissory note makes sense 

A promissory note contains the maker’s promise to pay a defined amount on demand or at a fixed or determinable future time. Unlike an invoice, it is a distinct payment instrument and may be transferable where its terms and governing law permit. 

A note can therefore connect an approved obligation bc a potential funding route, but it does not guarantee tooflap. A funder will still assess the obligor, transaction, and enforceability. ETR Digital’s guide to digital promissory notes explains the electronic lifecycle. 

When a bill of exchange is more appropriate 

A bill of exchange is the drawer’s order directing the drawee to pay. Once accepted by the drawee, the obligation may be transferred or discounted, subject to its terms, governing law and a funder’s requirements. 

This can suit supplier-led transactions: the supplier draws the bill, the buyer accepts it, and the supplier may seek earlier liquidity. A digital bill of exchange can replace physical issuance, delivery and endorsement with a controlled electronic process. 

When a letter of credit solves the right problem 

A documentary letter of credit focuses on payment assurance. Under UCP 600, when incorporated, an issuing bank gives an irrevocable undertaking to honour a complying presentation. Banks examine documents, not the underlying goods or performance. 

This can help where trading history is limited, country risk is material, or documentary control matters. The trade-off is greater process discipline, including compliant documents, discrepancy management, bank lines and fees. 

When open account is the practical choice 

Under open-account terms, a seller supplies goods or services, and the buyer pays on the agreed date. The structure is simple and often suits established relationships. 

Open account does not provide a bank undertaking or create a negotiable instrument. Earlier supplier payment, longer buyer terms or added assurance therefore requires a separate financing or risk layer. 

How digitisation changes the decision 

Digitisation can reduce friction in issuing, signing, transferring, controlling and settling certain trade finance instruments. It does not remove the need for legal analysis. 

The UK Electronic Trade Documents Act 2023 allows qualifying electronic trade documents to be possessed in law. The UNCITRAL Model Law provides a framework for functional equivalence, control and integrity. Adoption varies, so treasury should verify each relevant jurisdiction. 

Where Working Capital Notes™ fit 

Working Capital Notes™ are ETR Digital’s digital promissory notes or digital bills of exchange. They can represent approved obligations in a controlled workflow and provide a financing route where a funder accepts the transaction. 

Treasury should assess the obligor, maturity, funding route, accounting treatment, and governing law, and compare the structure with existing bank and supplier-finance arrangements. 

Frequently asked questions 

What are the main trade finance instruments? 

Common options include promissory notes, bills of exchange and letters of credit. Open account is widely used but is a payment arrangement, not a negotiable instrument. 

What is the difference between a promissory note and a bill of exchange 

A promissory note is the maker’s promise to pay. A bill of exchange is the drawer’s order directing the drawee to pay and may require acceptance by the drawee. 

Can trade finance instruments be digital 

Yes, where applicable law recognises the format and the system meets requirements for identity, control, integrity and transfer. 

Which option is best for working capital 

There is no universal best option. Define the objective, then assess funding appetite, cost, documentation, accounting and legal treatment. 

Choose the objective before the instrument 

The best trade finance instruments solve a defined treasury problem without unnecessary complexity. Notes and bills can create transferable obligations, letters of credit provide bank-supported assurance, and open account preserves simplicity. 

Once the objective is clear, treasury can compare the obligor, funding route, operational burden, and legal framework. Explore Working Capital Notes™ to assess how digital promissory notes or bills of exchange could fit your working-capital strategy. 

General information only. Obtain legal, accounting and tax advice before implementing any instrument.