If your company imports finished goods to sell onto your customers, trade finance is well worth considering. It’s not only great for maintaining a steady cashflow, but also offers the ability to pay your suppliers on time and in one payment (which can result in better pricing and strengthened trade relationships).
Below we explore how trade finance works and why it is so effective.
What is trade finance?
Trade finance is a short-term solution that bridges the financial gap between paying your supplier and getting paid; a situation often seen by those importing goods on behalf of a customer, though it also includes UK-based trade.
The exact trade finance solution varies depending on the scenario, but in general:
You receive a purchase order from your customer for the goods
You order from your supplier, who requests payment before or as the good are shipped
Your trade finance pays the supplier directly
Your customer pays for their order
You pay back the trade finance facility
This process completely circumvents a dip in cashflow, making it possible to fulfill even your largest order to date without jeopardising your financial integrity. In some cases, you may need to pay the supplier’s deposit upfront then be refunded by the finance facility.
The advantages of trade finance
There are a number of advantages to the trade finance process:
Steady cashflow: no need to clear out your bank balance to pay a supplier before a customer pays you
Supported growth: larger orders which were previously unviable because of cash flow worries can be fulfilled, allowing you to expand into new markets
Greater buying power: no need to obtain credit from your suppliers when they require payment before or on shipment of goods
Stronger trade relationships: offers the ability to pay your suppliers on time and in one payment
Additionally, trade finance is different from, for example, a bank loan or another type of finance solution. The ability to get the finance is based on the strength of the transaction you’re funding, as opposed to the balance sheet of your business. This means where a bank will not lend you the money, a trade finance agreement may succeed.
You can finance up to 100% of the landed cost of the goods and up to £1m value. Plus, your facility limits can grow with your business as you build up a track record.
Things to note about trade finance
It’s worth noting that trade finance is only available when the supplier does not offer credit purchases. Plus, if the goods are not pre-sold before ordering from the supplier, a track record will need to be demonstrated to ensure the goods are sold shortly after the finance has been granted. It is a short term solution, after all.
When applying, it also helps to be an experienced and credible director with experience in your current sector.
Combining trade finance with invoice finance
Invoice finance is often used alongside trade finance to allow a quicker exit from your trade finance agreement.
As explained above, your trade finance facility pays your supplier so you can receive your goods. However, if your customer is on 30, 60 or 120 day terms to pay you for the goods, this may not be ideal for you repaying the trade finance.
The extent to which this is true will depend on your unique agreement with the lender. To get round this, invoice finance can be used in tandem.
In this new scenario, your trade finance facility still pays the supplier for the materials to reach your factory. But when the goods are invoiced to your customer, your invoice finance facility pays the trade finance facility directly. You then repay the invoice facility as per your agreement.
Support with business finance solutions
Overall, trade finance is a dynamic funding tool used by many businesses to achieve sustainable growth and success.