What is trade finance?
Trade Finance is a specific type of finance whereby you fund supplier invoices from day one and settle the balance at a later date. The strength of this type of finance is that it allows you to bridge the cash flow gap between supplier invoices and customer payments.
Who is it suitable for?
Generally aimed at wholesalers, distributors and manufacturers that are buying physical goods. More modern types of trade finance are also allowing for supplier invoices that include paying developer teams on a project basis; this can be incredibly useful for technology companies.
How does it work?
Trade Finance presents itself as a solution in a number of different scenarios. One example where Trade Finance serves businesses as an incredibly useful finance facility is in 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 pays, 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. 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, they pay 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.
What are the benefits of trade finance?
Take advantage of extended 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 to suppliers
An alternative for a letter of credit (letters of credit can be expensive and take weeks for trades to go through)
Can work alongside invoice factoring and term loans etc