Trade Finance
Trade finance consists of a variety of different funding methods that can be used. All forms of trade finance share one goal – to keep suppliers paid on time. There is a common misconception that such form of finance is only used for goods imported from overseas. Although it is often used to ensure exporters are paid on time, trade finance can also be used to stabilise the supply chain with suppliers also based in the UK.
How does Trade Finance work?
Trade finance is used to keep both importers and exporters happy and ensure that the supply chain is not impacted by anyone paying late. How it works, depends on where your business fits in the supply chain.
Import Finance – this is very much purchase order driven and helps businesses in the UK import goods and raw materials from exporters. Import finance can allow a business in the UK that purchasing power required to by stock from overseas.
Export Finance – this is where we can help business that export goods out of the UK overseas. Unfortunately, it is nature of the beast in this industry as cash flow is always impacted when trading with buyers overseas.
Frequently asked questions
- What is trade finance?
- How does trade finance work?
- What forms of trade finance are there and which is best for my business?
- What are the benefits of trade finance?
- What are the disadvantages of trade finance?
- How much does trade finance cost?
- What type of business is suitable for trade finance?
- Can trade finance work alongside other funding facilities?
- Is trade finance for export only?
- How quick can trade finance be arranged?
- How long can I use trade finance for to bridge the gap?
Over
Companies in the UK
using Invoice Finance
Over
Billion invoices
funded in the UK
Over
Coffees consumed at
Contact Business Finance
What forms of Trade Finance are there and which is best for my business ?
What type of trade finance is most suitable to your business depends on your needs and where you sit in the supply chain.
Purchase Order Finance – this type of funding is purchase order driven. This type of funding can be used when your business receives a purchase order from a client. The financier can pay the supplier direct for your business to fulfil that purchase order. Purchase Order Finance often requires the lender to be paid direct from the client. The lender is only responsible for paying the supplier and then receiving payment from the client.
Letters of Credit – A letter of credit (LOC) is a letter from a bank or lender to an exporter guaranteeing that the payment will be made from the buyer within a certain timeframe. The buyer who applies for a LOC must set the standards with a detailed terms and conditions of purchase on how they would like to buy and import the goods. Such facility gives exporters comfort that their money is guaranteed to be paid on time.
Contract Finance – this form of trade finance works very similar to Purchase Order Finance. However, in this case you are using a finance companies’ money to fulfil a contract. This can be great for your business as you can now afford to take on contracts which your business might not have been able to afford previously. This can be a great funding mechanism to have available so you can pay for upfront costs associated with the contract such as materials, design costs etc.
Cash Advance / Deposits – this is where money is forwarded to an exporter prior to them shipping the goods. This is often based on trust but keeps exporter happy as they continue to produce goods when they get an order. There are risks associated with a buyer.
Trade Credit – this is when a supplier is happy to sell goods on payment terms after goods have been delivered. This is often 30, 60 or 90 days. Credit insurance is taken out by the supplier on the buyer due to the risk of non payment.
What are the benefits of Trade Finance?
Pay suppliers on time – if a business can pay suppliers on time, they can get stock into the business sooner to sell.
Improve margins – if a business can pay their suppliers sooner. It is quite often the case they can ask for a discount from their suppliers. All suppliers, exporters, wholesalers etc like getting paid in a timely manner.
Increase turnover – if your business can pay for supplies sooner and sell goods straight away. You might find that your business can increase sales as you are able to trade quicker and more efficiently.
What are the disadvantage of Trade Finance?
Cost – trade finance can be costly if a lender is not paid back in a timely manner.
Control – a lot of trade finance facilities are subject to how other businesses in the supply chain perform which is sometimes out of your control. For example, you might expect to pay a trade financier back within 30 days, however a shipment issues could delay the trade.
Terminology – a lot of trade finance houses use different terminology for their products. This can sometimes make products hard for business owners to understand.
Exporting / Importing regulations – changes to the rules on how a company can import or export goods means that sometimes trade finance facilities can have more restrictions.
What forms of Trade Finance are there and which is best for my business ?
What type of trade finance is most suitable to your business depends on your needs and where you sit in the supply chain.
Purchase Order Finance – this type of funding is purchase order driven. This type of funding can be used when your business receives a purchase order from a client. The financier can pay the supplier direct for your business to fulfil that purchase order. Purchase Order Finance often requires the lender to be paid direct from the client. The lender is only responsible for paying the supplier and then receiving payment from the client.
Letters of Credit – A letter of credit (LOC) is a letter from a bank or lender to an exporter guaranteeing that the payment will be made from the buyer within a certain timeframe. The buyer who applies for a LOC must set the standards with a detailed terms and conditions of purchase on how they would like to buy and import the goods. Such facility gives exporters comfort that their money is guaranteed to be paid on time.
Contract Finance – this form of trade finance works very similar to Purchase Order Finance. However, in this case you are using a finance companies’ money to fulfil a contract. This can be great for your business as you can now afford to take on contracts which your business might not have been able to afford previously. This can be a great funding mechanism to have available so you can pay for upfront costs associated with the contract such as materials, design costs etc.
Cash Advance / Deposits – this is where money is forwarded to an exporter prior to them shipping the goods. This is often based on trust but keeps exporter happy as they continue to produce goods when they get an order. There are risks associated with a buyer.
Trade Credit – this is when a supplier is happy to sell goods on payment terms after goods have been delivered. This is often 30, 60 or 90 days. Credit insurance is taken out by the supplier on the buyer due to the risk of non payment.
What are the benefits of Trade Finance?
Pay suppliers on time – if a business can pay suppliers on time, they can get stock into the business sooner to sell.
Improve margins – if a business can pay their suppliers sooner. It is quite often the case they can ask for a discount from their suppliers. All suppliers, exporters, wholesalers etc like getting paid in a timely manner.
Increase turnover – if your business can pay for supplies sooner and sell goods straight away. You might find that your business can increase sales as you are able to trade quicker and more efficiently.
What are the disadvantage of Trade Finance?
Cost – trade finance can be costly if a lender is not paid back in a timely manner.
Control – a lot of trade finance facilities are subject to how other businesses in the supply chain perform which is sometimes out of your control. For example, you might expect to pay a trade financier back within 30 days, however a shipment issues could delay the trade.
Terminology – a lot of trade finance houses use different terminology for their products. This can sometimes make products hard for business owners to understand.
Exporting / Importing regulations – changes to the rules on how a company can import or export goods means that sometimes trade finance facilities can have more restrictions.
How much does trade finance cost?
The cost of a trade finance facility varies depending on which lender and what form of trade finance facility your business requires. For a lender to produce a quote, they would want to have a clear understanding of the business, the supply chain and the volumes trading with suppliers a business wishes to pay on time. Typically, we see interest rates between 1.2% and 3% per 30 days. It is worth noting that sooner you can pay a trade financier back their money, the more cost effective this funding solution can be.
Can trade finance work alongside other funding facilities?
It is quite often that trade finance facilities work alongside other working capital related facilities. Generally, the longer you borrow from a trade finance facility, the more it will cost. After you have purchased the goods and sold them, a business still needs to wait for their debtor to pay so the trade finance facility can be settled. This could take up to 30-60 days depending on the payment terms in place with clients. Having an invoice finance facility can speed up the process and pay the trade finance facility down by releasing cash from the outstanding invoice the very same day a business raises a sales invoice. This allows a business to settle the trade finance facility in a timely manner and keep the costs of borrowing down.
How quick can trade finance be arranged?
A quote can be presented to you within 24 hours. Such facility we often see take at least 3 days to be formally approved.
What type of business is suitable for trade finance?
Trade finance is suitable for any business that wishes to bridge the gap and help purchase products from suppliers to later sell for a profit.
Growing businesses often benefit the most by having a trade finance facility. Such facility can give a business more purchasing power, by having the ability to keep suppliers happy, purchase more supplies to grow the business.
Wholesale isa sector that we often see use trade finance facility. Buying the correct product in this sector is very important. However, buying the product at the correct time is even more important as it is all about margins. Trade finance can allow wholesalers a funding line to enable them to purchase from suppliers when their debtors are in demand.
Is trade finance for export only?
No, it can also be used to improve relationships with domestic only parties also. It is a misconception that it is for overseas trading only, but that isn’t the case.
How long can I use trade finance for to bridge the gap?
Trade finance can be used for various lengths of time. It is crucial that a business deals with a lender that is aware of the timescales and understand the trade cycle.