Trade Finance

Trade Finance

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Gary Hemming

Author: Gary Hemming CeMAP CeFA CeRGI CSP

20+ years experience in business loans

Trade finance is the name for a range of financial packages that help businesses manage payments and cash flow when trading internationally. Also known as export finance, it is an important tool for managing and mitigating risks of long waiting times for payment or non-payment for goods or services.

Whether you’re an importer or an exporter, this article will give you the information you need to access funding for your supply chain.

What is trade finance?

There are different forms of trade finance, and the type you choose will relate to the stage your business is at and the type of goods or services you provide. For example, if you have a new business you might wish to arrange finance based on future profitability rather than past performance.

Ultimately, whatever type of trade finance you choose, the upshot is that you are mitigating risk by obtaining upfront funding or a guarantee that if your buyer doesn’t pay then you will be paid through other means – such as by your insurer.

Ultimately, trade finance solutions are designed to act as a method of supply chain financing to support cash flow by releasing funds to support your trade transactions.

This can be used as a tool to help manage cash flow on an ongoing basis, to finance business growth or to cover the costs of people, goods and services.

How does trade finance work?

Trade finance brings a number of parties together to help the buyer and sellers offset risks that could relate to delayed or non-payment, goods not arriving, or other unexpected circumstances that could arise when dealing internationally.

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How trade finance can help importers?

This type of trade finance enables businesses to function without tying up cash flow and is especially useful when purchasing goods and materials from overseas suppliers; it ensures that issues such as lengthy shipping times or payment delays don’t tie up capital for long periods of time enabling you to carry on trading.

How trade finance can help exporters?

Export finance refers to a range of financial products that offset some of the risks involved with overseas trade.

When selling abroad there can be long periods where cash is tied up and also issues such as fluctuations in currency, changes to trade policies and issues relating to the certainty of payments when dealing with unknown parties.

It can be used by a wide range of organisations including small and medium sized businesses (SMEs), corporations and charities; it is designed to be flexible and accessible. It is a useful tool to help mitigate risks and ease the burden of trading abroad.

There are different forms of finance available, here we look at some of the most common types of export finance:

1. Export credit insurance (ECI): This type of insurance that covers the risk of non-payment by a foreign buyer. It can be put in place to cover one specific trade, or apply to a portfolio and last for up to five years.

Export credit insurance gives the seller confidence that they will receive payment as it minimises the risk of default from the buyer. Even buyers with a good credit-rating can experience unforeseen difficulties and so this type of insurance is helpful for those who want to minimise the risk of non-payment.

2. Letters of Credit (LCs):

A letter of credit is issued by a bank. It is a guarantee that the buyers will pay the seller the correct amount and that this payment will be made by an agreed date.

In the event that the buyer cannot make the payment, the bank would then make the payment. This gives absolute certainty to the seller that payment will be made.

3. Export factoring, also known as invoice financing: This is an arrangement where invoices are sold to a third party financier or factoring company at a discount. The financier pays immediately for the invoices and then the debt transfers to them to collect from the foreign buyer.

Invoice financing can help a business maintain cash flow if payments are outstanding for a long time and money is required urgently.

4. Working capital loans: These are loans that help businesses fulfil overseas contracts and orders; whether this is to finance the production of goods or to cover the period between shipment and payment. Working capital loans can be secured against assets and this includes invoices.

What are the pros and cons of trade finance?

Here are the key pros and cons of trade financing

Advantages

Trade finance has a number of benefits, such as: reducing waiting time for payments, reducing the risk of trading overseas, helping businesses deal in new markets and widening their customer base and taking away the uncertainty involved in unfamiliar trading territory

Disadvantages

Most types of trade finance are not available to startups, they are only available to established businesses that have assets and can demonstrate a trading history.

The process of obtaining trade finance can be complex and this can be time consuming. It is recommended that specialist advice is taken to understand the types of finance on offer and what is most appropriate in relation to your circumstances.

Will I qualify?

Your broker will be able to guide you through the many different types of finance available. ABC works with a wide panel of lenders and so it’s likely we will be able to help your business obtain finance.

What are the costs?

Costs vary depending on your company’s credit score, history of trading, balance sheet and the assets you hold. In some circumstances trade financing can be very competitively priced for businesses with good credit, in other cases interest charges will be higher for unsecured loans and newer businesses.

It is advisable to thoroughly understand the range of finance options available before entering into an agreement.

Who offers trade finance?

Trade finance providers, export credit agencies, banks and insurers offer trade finance.

In the UK, if your bank or a lender can’t help then UK Export Finance working alongside the Department for Business and Trade may be able to help.

What other options do I have to finance my business?

When you’re looking for working capital finance, there are a number of options available to fund your business. These can be broadly broken down into business loans, invoice finance, asset finance and revolving credit such as business credit cards and overdrafts.

Business loans can be broken down into 2 main types, unsecured business loans and secured business loans. A key advantage is that business loans can be arranged quickly, making them a great option for when funds are urgently needed.

Invoice finance, also known as debt factoring can be broken down into invoice factoring and invoice discounting. The key differences come down to who is responsible for credit control. Confidential invoice discounting allows you to borrow without alerting your customers.

Asset finance allows, also known as equipment finance allows you to raise funds to purchase an asset, or to facilitate the leasing of the asset. Much like other types of supply chain finance, such as import finance and export finance, any company that trades overseas can consider export financing.

Frequently Asked Questions

Funding usually takes two to three weeks on average, depending on the type of trade finance you opt for.

Business cash flow financing can be arranged within several days, however, other types of loan will take longer especially when they are secured against invoices or assets.

We will support you through the process and have many years of experience working with a range of specialist brokers throughout the country to find the right match for our clients.

Yes, there are a range of options available for businesses with poor credit, low creditworthiness, or newer businesses that do not have an extensive finance history.

Contact the experienced team at ABC Finance for a callback and discussion about your needs.

With twenty years of experience in trade finance and a wide panel of lenders, we focus on getting you the right solution for your business.

Yes, we can structure transactions with one or multiple providers to give you the funds you need.

There is never a ‘one size fits all’ solution and so make sure to work with finance specialists who seek to thoroughly understand your business and your needs.

Want help finding your perfect solution?

Request a callback from our team of experts at a time convenient for you.