In this current economic climate, businesses – especially those looking to expand – tend to trade with other organisations beyond national borders. Trade finance is a form of business finance that funds the cashflow gap between the purchase and sale of goods. It can enable businesses to capitalise on the global trade market conditions to expand their business.
What is Trade Finance?
Trade finance is a funding facility that provides importers with instant funding against confirmed customer orders. Simply put, trade finance refers to financing short-term business transactions, usually international. It ensures an ongoing supply of cash against your sales ledger.
Language barrier, risk of bad debt, supplier difficulties are some examples of the challenges faced by businesses. Trade finance provides a financial package for businesses to fund their whole trade cycle. It ensures timely payments between you and your suppliers and could include credit insurance against customer defaults.
How does it work?
Most trade finance arrangements are administered alongside an invoice finance (factoring and invoice discounting) facility where funding is received against the value of your sales ledger. Trade finance works in the following way:
• A customer places an order for goods/services
• You source goods from your supplier
• Your supplier requires prepayment for the goods before they are shipped to you.
• On the basis of the confirmed order, the lender advances up to 100% of the invoice order value for you to pay your suppliers – via a letter of credit to your supplier or supplier’s bank or paying you directly.
• Your supplier ships the goods to you
How invoice finance works with trade finance:
• Upon delivery, you supply your customers, invoice them and send a copy of the invoice to the invoice finance provider
• The invoice finance provider makes available up to 90% of the invoice value
• You settle your invoice with the supplier
• The lender chases your customers and collects payments on your behalf
• Your customer settles their invoice and you receive the 10% remainder balance, less any facility charges.
Am I eligible for Trade Finance?
Trade finance injects valuable cash into your business and can help your business open up new markets with a peace of mind. Trade finance is suitable for your business if:
• You trade with other businesses
• You issue credit terms of 30-90 days
• You have an annual minimum turnover of £50000
Benefits of Trade Finance
• Improve your cashflow: Upfront payment of up to 100% of the order value could be released within 24 hours. This bridges the cashflow gap between paying your supplier and being paid by your customer.
• Cost-effective: Attractive cost of funding relative to traditional finance sources. The facility is priced depending on the strength of discounts and take-on volumes – advantageous pricing at a negotiable market discount.
• Bad debt cover: Most trade finance agreements include bad debt cover which protects your business against non-payment and bad debt. Can be structured to offer security and peace of mind to both trading parties.
• Flexible: The facility could be tailored to match your business’ requirements. The funding released via invoice finance is based on your sales turnover – as your business grows, you could have access to more cash.
• Business growth: The use of letters of credit for supplier payments promotes growth as there’s no need to use your business’ assets as collateral for the transaction. Also you benefit from material cashflow gains arising from regular supply of goods with no payment until the final shipment.
• Online access: Most trade finance providers allow customers to monitor their accounts online 24/7.
GUEST BLOG: This business advice article was provided by Sema Kummar from Invoice Discounting.