Trade Finance | Non Banking Trade Finance
One of the backbones of international trade, trade finance can help your business with extra liquidity. You might have a funding gap between paying for products and services and selling those products, that's where trade finance steps in.
For the sake of this article, we are going to speak about revolving credit trade finance facilities that are widely used as a direct form of funding for imports. We look at how the industry has changed from only banks offering this service to now non-banking finance providers stepping into the arena and also who to ultimately use:
Trade Finance with Banks
Not too long ago the letter of credit was the main form of financial solution for importers and exporters. Whilst this provided a guarantee to your supplier that funds would be received upon certain conditions being met it wasn’t as flexible and effective as a revolving credit trade finance facility when conducting global trade.
Letter of credit is still one of the most widely used forms of trade finance but it does come with its limitations. Businesses wanted a form for funding where they can pay for their purchases upfront, this can help with getting supplier discounts and generally lead to better supplier relationships in the long term.
Hence the finance banks then went on to create were there to service and cater to businesses needs more widely. The revolving credit trade finance facility (trade loan) was born, this allows businesses to utilise a certain level of pre-approved funding to pay their suppliers directly and once paid back can use again.
With banks having sight of your businesses funds they can get a clear picture of how much of a facility they should grant you. This can come with lower costs but likewise longer wait times due to internal procedures.
From our experience banks can be slow to get back to customers throughout the application process, sometimes taking as long as 2 to 3 months to get a facility in place. Whilst the fees that you would pay on the financing facility might be less if you are in urgent need of funding it might be better to see what else is available.
Non-Bank Trade finance
Since the 2008 financial crisis banks have come under increased regulations from governing bodies. This has created a higher bar to entry for trade financing products and decreased banks willingness to lend and take risks.
We are seeing this increase at the moment due to the amount of lending that banks have conducted over the last few years with different government-backed products like CBILS and the Recovery Loan Scheme. SME’s debt levels have raised 25% throughout the Coronavirus pandemic mostly down to the products listed above, decreasing banks appetites risk further.
Whilst sometimes more expensive this is why non-banking financial service providers have picked up a large portion of the lending that the banks will not fund. Ironically enough a lot of these financiers will have securitisation (agreed amount of funding provided) from banks although some do get capital through investors and hedge funds.
Seeing a large portion of the SME market not being serviced by the banks these non-banking providers started to capture that remaining market share. Creating products that could provide working capital, be more flexible and easier to access.
A high number of funders do offer these facilities with caveats, either you have to conduct your foreign exchange through them or you have to have an accompanying invoice finance facility so that funders can see both sides of the transaction. We look into invoice finance here.
Due to not holding customer deposits like banks, they would normally ask for some form of security over the business. This can come in the form of personal guarantees, control over assets, debtors and much more. Although often the case new products have evolved with limited to no security which we will dive into next.
One thing that you will have to look into when conducting trade finance is foreign exchange. Sending transactions abroad can really eat into your profit margins, check out our comprehensive article here.
How products have changed
Security over your business to provide trade finance is a way that non-banking providers can protect themselves. If anything were to go wrong and you were to default on the financing the funding company would seek to regain their losses through assets or other forms of security.
Recently though new products have come to the market, provided by non-banking trade finance providers that have heavy investment and access to a large amount of capital.
Now there are options out there that offer no security trade finance facilities meaning that all you would need to do to get access to the funding is being approved. Sounds easy doesn't it, but with more risk that these providers take on comes higher barriers to entry.
From our experience, these financial institutions work from your net assets when gauging how much funding to grant you. Normally 30% of net assets would be the highest level of funding that you would be granted.
Obviously, they're a lot more factors are taken into consideration including but not limited to:
The trajectory of net assets over the last 3 years
Performance of the business
Debtors (businesses you are purchasing from)
What is better - bank or non-bank trade finance?
With many different options of providers to choose from, how do you settle on one? There are a few specifics that you need to take into consideration so below we have listed the pros and cons of each.
Normally more competitive pricing
Can link in with their other suite of products
Everything is done through your bank so you keep everything under one roof
Normally very slow to give you a yes or no answer
Have a more stringent process for granting you the funds
Will normally take security over the business
Can offer no security trade finance from some providers
Normally get back with an answer relatively quickly
Providing funding when the banks can not
Some lenders have a large array of services offered
Sometimes more expensive than banks (not always)
Unsecured facilities have higher barriers to entry
Ultimately the right answer is going to come from what stage your business is. Normally businesses would try their banks before looking to the external market but we would encourage you to look at both so you get a clear picture of what is on offer.
With many different options available on the market it is always worth exploring how non-banking trade finance providers can help your business. If you want to learn more about the costs of different trade financing products please read our article here.
Always happy to help with finding the right solution for your business, do contact us here: