Trade Finance

Trade Finance, also known as import finance, is a cash flow funding solution for importers whereby funding is provided against confirmed trade orders. This funding ensures that the finished goods are purchased (from overseas) for onward sale. Trade finance thereby, bridges the gap between the import and purchase of goods.

It is an area of business finance that usually co-exists alongside factoring, invoice discounting and bank overdrafts. However, it can be administered as a single facility to fund the complete trade cycle – from paying for your goods right through to the delivery of the goods to your customer.

Forms of Trade Finance

Businesses are now hindered from growing due to the lack of available finance through traditional forms of borrowing. It is evident that globalisation is taking over the world which makes trade more and more vulnerable to changes. Trade finance companies are now under pressure to improve service levels and to handle a growing range of products. These have brought about several forms in which the facility could be administered;

  • Trade finance for the import or export of goods
  • Purchase finance to pay for ordered finished goods
  • Purchase finance to pay for raw materials to be used in the manufacturing process
  • Export finance to fund the VAT charged in export sales.

How Trade Finance works with Invoice Finance

It’s important to note that most trade finance facilities are administered alongside an invoice finance facility whereby the outstanding invoice is used as the principal asset against which the funds are released. Below are the steps which demonstrate how both facilities could work together to improve your cash flow position.

  • You receive an order from a customer
  • You source goods from your overseas supplier
  • Typically, your supplier requires prepayment for the ordered goods before they are shipped to you. Your supplier then documents all the details of the shipping, including supplier invoices and proof of payment receipts.
  • Your overseas supplier invoices you.
  • On the basis of the confirmed order, your lender then advances up to 100% of the confirmed order value for you to pay your suppliers. Your bank could also provide a letter of credit directly to your supplier, who then ships the goods.
  • You supply the shipped goods to your customer.
  • Once the goods are delivered, you will invoice your customer and send a copy of the invoice to your lender.
  • Your lender chases your customer and collects payments on your behalf.
  • Your customer then settles their invoice. There’s no remainder balance because your lender funded the complete overseas purchase.

Benefits of Trade Finance

  • 100% of the confirmed order value advanced to you which improves your cash flow position significantly. It funds the gap between paying your supplier and being paid by your customer.
  • The facility is flexible enough to permit you decide when you want the cash, how often you want the cash, as much as you want and for as long as you want. The funding released is based on your sales turnover so as your business grows, you could have access to more cash.
  • It’s often possible for you to release previously pledged securities which makes it easier for you to repay your lender. Most trade finance companies provide finance based on alternative assets and often offer flexible terms as part of a funding package.
  • You do not have to worry about the documentation in the process. The majority of the paperwork is done by the trade finance company. This frees up management time and enables you trade with confidence.
  • Most trade finance companies offer credit protection which minimises the risk of bad debt and untimely delivery of goods.
  • The facility is often cost-effective. It is priced depending on the take-on volumes, strength of discounts and the interest rate – prices could be discounted to meet your requirements.
  • The cash advanced can help improve your bargaining power whilst you take advantage of early supplier discounts.

How to access Trade Finance

Too often, it is advisable to speak to a commercial finance broker such as Touch Financial (‘Asset based broker of the year 2011’) where they will thoroughly talk you through the various finance options available to you. They have a panel of trade finance partners and lenders that understand the difficulties faced by businesses that rely on international trade.

Also, there is a risk of choosing a lender who doesn’t know your market because they will be less likely to lend in the first place and even if they do, they could have less confidence in your ability to succeed, which could cause them to withdraw facilities.

Our services are free and independent and specifically tailored to your sector. Call Touch Financial on 0845 388 9725

This business advice article by Sema Fongod from Touch Financial, the Factoring specialists.

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