Updated: Nov 19
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Trade Finance is a specific type of finance used for payment of supplier invoices. The strength of this type of finance is that it allows you to bridge the cash flow gap between supplier invoices and customer payments. A trade finance facility allows businesses to access a pool of cash that is used for payments to their suppliers, generally including pre-shipment charges and deposits. Once the funds are sent to the supplier, the business utilising the facility will have anything between 90 - 150 days in order to pay the funds back into the facility, including added interest for the trade finance lender. Some lenders offer facilities with no set up charges, and no maintenance charges, so you only pay interest on the funds you use. Other lenders offer a subscription fee based service.
What is unsecured trade finance?
Unsecured trade finance means that no debenture is taken over your business, so you don’t have to tie up stock, assets or your debtor book. It’s very beneficial for businesses who already have secured banking facilities in place such as invoice finance, or a term loan, as it essentially provides them an extra pool of liquidity on top of what they’re already using. For businesses looking to grow by purchasing more stock, it’s the perfect tool to boost their cash flow and their purchasing power.
Who is it suitable for?
Generally aimed at wholesalers and distributors who are buying physical goods. It’s also useful for manufacturers buying materials, and more modern types of trade finance are also allowing for supplier invoices that include payment of invoices such as tech development teams or consultancy based projects.
How does it work?
Trade finance presents itself as a solution in a number of different scenarios. One example where it serves businesses as an incredibly useful solution is within the garden furniture industry.
Mike’s garden furniture business is seasonal, and during his busy months leading up to summer in the UK he needs to fulfill many invoices from his suppliers based in China.
On Day 1 Mike orders his goods from his Chinese supplier. By day 30 the goods are finished, the supplier issues an invoice which Mike must pay immediately, then the supplier ships them. By day 75 the goods arrive at Mike’s warehouse in the UK and get delivered to Mike’s clients. He allows his clients 30 days credit terms and so he gets paid on day 105 of the trade cycle. This leaves a large cash flow gap of 75 days of which Mike's business is temporarily out of pocket.
When Mike decides to use a lending company’s trade finance solution, the lender pays the supplier invoice on day 1. Throughout the whole trade cycle Mike then manages to fill his cashflow gap and when he’s paid on day 105 when he settles the balance with the trade finance company, which is the total loan plus accrued interest. With the extra cash retained within the business, Mike can take advantage of increasing demand for his products and can make larger purchases of stock from his suppliers than his cash in the bank would have initially allowed. His supplier also allows him an early settlement discount for paying upfront for the goods, which effectively brings down the cost of his trade finance facility.
What are the benefits of trade finance?
Take advantage of extended credit terms by paying your invoices when due
Settle deposits for goods that require funding before shipping
Have peace of mind that the goods you pay for are all yours (unsecured)
Negotiate early settlement discounts with suppliers
An alternative for a letter of credit (letters of credit can be expensive and take weeks for trades to go through)
Work alongside an invoice finance facility or term loan etc
How much funding could I receive through trade finance?
Importantly, as trade finance works by sending funds to your suppliers rather than customer invoices being covered (invoice finance), then there are different requirements that determine the level of funding you may receive. Lenders look for strong and profitable businesses to consider, and if you’re looking for an unsecured facility then as a general rule of thumb you may be eligible for around ⅓ of net assets on your business balance sheet. If you are willing to put up security such as debenture of your stock, business assets, or personal assets, then you may be eligible for a larger facility.
How can I apply for trade finance?
There are many ways to apply, and there’s a variety of finance lenders on the market who offer varying trade finance solutions. If you wish, you can make enquiries with any of these lenders, or alternatively you can speak with one of our team at Funding Routes and we’ll give you an unbiased view of what’s available on the market, based on your business requirements.
At Funding Routes, our team is fully adept at sourcing trade finance solutions for our clients. Whatever your industry and business needs may be, there is always a facility that can work for you, allowing you to boost your cash flow and grow your business. Get in touch with us to see what options are available for you.