Benefits of trade finance
Key benefits of trade finance include:
- Reduced risk
- Improved cash flow
- Access to new markets
- Flexibility
Trade finance helps to reduce the risk of non-payment by providing a guarantee of payment to the exporter, ensuring that they are paid for their goods or services. This can also protect importers by making payment contingent on goods meeting certain quality checks and being manufactured to pre-agreed timescales.
Trade finance can directly address cash flow challenges by providing financing to the exporter at the pre-shipment or post-shipment stage, allowing them to fulfil orders without having to wait for payment. Importers can use trade facilities to finance their entire order cycle from point of purchase order, through to distribution of goods to their clients.
Often businesses will have to make large upfront payments for goods that may not be received, let alone sold, for months. Trade finance can ease the cash flow burden of facilitating large orders from clients or general stock purchases.
What is trade finance?
Trade finance refers to the financing of international trade transactions, including imports and exports. It is used to mitigate the risks associated with these transactions, which may include political risk, currency risk, and credit risk.
These facilities can enable businesses with an international supply chain to scale effectively whilst mitigating supply chain risks.
Types of trade finance
Letters of credit
A letter of credit (LC) provides a secure way for importers and exporters to carry out international trade. An LC is issued by a bank on behalf of the importer and is a guarantee that the exporter will be paid once they have shipped the goods and provided the required documents. The exporter can present these documents to the bank and receive payment. This reduces the risk of non-payment for the exporter and gives the importer the assurance that the goods have been shipped.
LC’s can also have additional conditions written into them, such as quality control checks, to ensure goods are manufactured to the importers expectation and specification.
Supply chain finance
Supply chain finance is a financing method that aims to optimise cash flow and working capital for both buyers and suppliers. Supply chain finance programs work by providing early payment to suppliers in return for a small fee. This allows suppliers to receive payment earlier than their normal payment terms, improving their cash flow. Buyers can also benefit from longer payment terms, allowing them to manage their own cash flow more effectively.
Export finance
Export finance is specifically designed to help businesses that are exporting their goods or services overseas. Export finance can include a range of financing options such as loans, guarantees, and insurance. Export finance can help businesses manage the risks associated with exporting, such as non-payment, currency fluctuations, and political risk.
Bank guarantees
Bank guarantees are a form of financial instrument that are issued by banks to guarantee payment or performance between two parties. Bank guarantees can be used for a variety of purposes, such as to secure loans, guarantee payment for goods or services, or to bid on contracts.
Trade finance is often conjoined with invoice finance which can be arranged alongside a trade finance facility or structured independently.
How does trade finance work?
A typical trade finance journey is as follows:
Initial review: You would provide us with a copy of your financials and business bank statements for review, along with example purchase order, billing, and details of your clients/manufacturing partners you are looking to structure finance with.
Credit assessment: The lender evaluates your unique circumstances and creditworthiness and determines a maximum credit limit.
- Drawdown: Once the credit limit is established, you can start supporting your trade activities, accessing funds as needed, up to the credit limit. You may be able to draw down and utilise the full limit all at once or in multiple tranches.
- Repayment: Depending on the facility, you may make monthly interest payments on the amount borrowed, or repay in full upon payment from your clients. You can repay and redraw funds as often as needed, up to the credit limit. The repayment schedule is flexible but these facilities tend to be most cost effective when you are revolving the funds and re-utilising them with new orders.
- Renewal: Trade facilities are often set for a period up to 12 months and subsequently renewed. As long as you have used and repaid the facility without issue, lenders would often be happy to renew and can adjust the credit limit based on your financial performance and creditworthiness to support your business’ growth.
