Modernising the letter of credit to support international trade

Maxime Girrès, CEO and Co-founder of Tulyp (#230)

May 19, 2024

Initially outlined in 2021, the Tulyp project came to life a year ago. After gaining valuable experience at iBanFirst and later at Revolut, Maxime identified an opportunity in the field of international commerce.

International trade finance, historically dominated by banks, is incredibly complex and slow, leaving an opportunity to address a significant pain point.

In this episode, you’ll find out how Tulyp improves the management of letters of credit, from the creation of the “escrow account” to the release of payments. This also gave us an opportunity for us to revisit the fundamentals of international trade and the essential needs of SMEs to streamline these transactions.

Trade Finance

Trade finance is the cross-border (or domestic) financing of goods or services in a commercial transaction, from the supplier to the final buyer. This term encompasses a variety of financial techniques and instruments used by importers and exporters.

The context

As indicated by the ICC (International Chamber of Commerce) in its 2023 report (here), globalisation is not disappearing but evolving. The ICC observes signs of economic decoupling between China and the United States, as well as between Russia and Western countries, highlighting several issues due to the acceleration of fragmentation. Also visible in the digital and financial domains, fragmentation reflects and exacerbates geopolitical tensions.

It should be noted that, according to the WTO, it is estimated that 80% of global trade depends on trade finance.

One of the major challenges for international businesses is financing. This financing includes several tools such as letters of credit, factoring, guarantees, or lines of credit.

The risks

Trade finance can help reduce the risks associated with international trade by reconciling the divergent needs of an exporter and an importer. Ideally, an exporter would prefer the importer to pay in advance for a shipment to avoid the risk of the importer taking the cargo but refusing to pay for the goods. However, if the importer pays the exporter in advance, the exporter could accept the payment but refuse to ship the goods.

A common solution to this problem is for the importer's bank to provide a letter of credit to the exporter's bank, which stipulates payment once the exporter presents documents proving the shipment, such as a bill of lading. The letter of credit guarantees that once the issuing bank receives proof that the exporter has shipped the goods and the terms of the agreement have been met, it will issue payment to the exporter.

With the letter of credit, the buyer's bank assumes the responsibility of paying the seller. The buyer's bank must ensure that the buyer is financially viable to honour the transaction.

But as Maxime explains, this process relies on often non-digitised documents, creating inefficiencies and significant costs for intermediaries, which affect their ability to support the international development of their clients, often secured by outdated instruments.

Escrow

An “escrow account” is a financial arrangement in which a neutral third party, called the “escrow agent”, holds and regulates the payment of funds required for two parties involved in a given transaction. This helps secure the transaction by keeping the money safe until all the conditions of the agreement are met, according to the terms of the “escrow agreement”.

The agent ensures that buyers and sellers fulfil their obligations before releasing the funds. For example, in the case of a real estate transaction, the agent can verify that the property inspection is completed and the property titles are clear. Once the conditions are met, the funds are transferred to the seller, and the transaction is finalised. This allows all parties to proceed with greater confidence, knowing their interests are protected.

Advantages

Escrow accounts offer several advantages in these transactions:

Security: They act as a neutral third party that holds the funds until all transaction conditions are met, thus protecting against fraud and non-delivery issues.
Trust: They increase trust between business partners by serving as a mediator to resolve potential disputes.
Payment Guarantee: They ensure that the buyer's payment is secured until the goods or services are received and that the seller is paid after delivery.
Simplicity: They simplify transactions, especially international ones, by facilitating currency conversions.
Compliance: They help ensure that transactions comply with local regulations, minimising legal risks.

Tulyp

In early 2022, I received a deck from Maxime through a contact, introducing me to SmarTrade. I did not hear from him again until another contact reached out to me in 2023 with the name Tulyp and a value proposition different from the first. I was delighted to reconnect with Maxime and see the progress made by this young entrepreneur. We took some time over coffee to understand what he aims to improve for SMEs dealing internationally.

Tulyp announced this week a first funding round of EUR 1.5 million led by Speedinvest with Kima Ventures and Purple Ventures.

Relying on the Israeli platform Rapyd, Tulyp has launched a platform that allows SMEs to access trade finance services similar to those of mid-sized companies. The Paris-based start-up centralises relationships between companies, clients, and suppliers, offering flexible payment options up to 120 days after goods are shipped through an escrow account, accessible in 60 countries and 25 currencies.

It is noteworthy that Tulyp verifies and confirms payments to sellers within 48 hours after receiving shipping documents.