What is Trade Finance?
Trade Finance provides funding for the importation of goods for resale to end-customers. It provides you with the ability to pay your foreign supplier for the purchase of finished goods. Whereas Invoice Finance funds the period after delivery until payment is received from the customer, trade finance funds the pre-delivery period, where Invoice Finance is ineffective. The financier will undertake to pay the supplier, normally using a Letter of Credit (LC) against the security of an order from a good quality customer. The Trade Finance provider is settled from customer receipts after the goods are delivered. The product involved will almost certainly be finished goods and the credit period involved no longer than 120 days.
Bank Trade Finance
Banks will often offer what they describe as a Trade Finance facility. This is more usually an LC facility that is marked against the user’s overdraft facility. True Trade Finance is where the lender takes their security in firstly the goods then the end-customer receivable. This kind of facility is rarely available from the main banks.
What does a Trade Financier look for?
True Trade Finance is often a risky lend. It is essential that the goods involved are readily re-saleable. It is therefore always important that the goods come from a reliable manufacturer or wholesaler. The end-customer will also need to be a good credit risk, the financier will usually look to insure against customer insolvency. Finally the financier will need to see that the contract with the customer is confirmed and watertight; if the goods are delivered to specification they will certainly be paid for, the contract is non-cancellable. Most deals will require an element of deposit to be paid by the client, 10% is not untypical.
Who can use Trade Finance?
The most important elements are the nature of the goods, the reliability of the supplier and the strength of the end-customer. The weaker the deal the higher the client deposit might be required. Trade finance can be ideal if your business does not have the financial track record or security to negotiate sufficient overdraft facilities or to get credit from your suppliers. This type of funding is often a necessity for young growing businesses that need to import goods. More established companies will often appreciate the cashflow advantage that trade finance brings; advance payments to suppliers are replaced with deferred settlement to a Trade Finance provider. This can often bring a 90-day advantage.
Purchase Finance is a form of Trade Finance that is available to stronger (insurable) buyers where the finance provider does not need to see a contract with an end-customer. The financier will make the purchase on the client’s behalf on the back of insuring the client. These facilities are now available from as little as £50,000 upwards.