Trade Finance: An Overview

Trade Finance, also known as purchase order 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 provides the security needed to keep goods moving in and out of the UK, ensuring that you and your suppliers are paid on time.

When you’re importing or exporting you don’t want your efforts frustrated by cash flow issues or payment problems. There are enough other challenges to contend with, such as shipping timetables and customs compliance, without worrying about whether payment will be made on time.

It is an area of business finance that usually co-exists alongside factoring, invoice discounting and bank overdrafts.

Taking the worry out of chasing overseas debtors

Trade Finance can give you some extra piece of mind when dealing with international customers. It could include factoring, which leaves credit control in the hands of the factoring provider. This means the factoring provider chases your customers and ensures that they are carefully managed to ensure payments are made on time.

How Trade Finance works with Invoice Finance

Trade and Invoice Finance will help fill payment gaps and keep a company’s cashflow secure. Both facilities can provide funding that uses an invoice as the principal asset against which money can be raised and are supplied by lenders who understand the cashflow issues of those undertaking international trade. 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 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 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.
• The cash advanced can help improve your bargaining power whilst you take advantage of early supplier discounts.
• Most trade finance companies offer credit protection which minimises the risk of bad debt and untimely delivery of goods.
• 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.
• 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.

Trade Finance Solutions

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 work with a panel of Trade Finance providers, who between them can cover every requirement. Their role is to understand your needs, match them with the most appropriate providers, and help you to secure the most cost-effective arrangement.

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.

If you would like help in finding the right financial partners, and in understanding more about how Invoice and Trade Finance can help your business succeed, then talk to us today.