Trade financing works by providing financial intermediaries that facilitate transactions between exporters and importers. For example, when an exporter needs to ship goods to an importer, a letter of credit can be used to ensure that the exporter gets paid. The bank issuing the LC guarantees the payment, provided that the exporter meets the terms and conditions specified in the LC. This reduces the risk for both the exporter and the importer, as the bank acts as a trusted intermediary.