We helped smartwatch firm Techsixtyfour get the trade finance they needed to buy stock from an overseas supplier

Trade Finance

If you’re a wholesaler, distributor, or importer, trade finance could give you the cash you need to pay your suppliers. There are various trade finance solutions, but what they have in common is they help you close the payment gap at the beginning of your sales cycle — so you can fulfil customer orders without being out of pocket for weeks at a time.

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Definition

Trade finance is a form of working capital finance, in the same family as invoice finance and supply chain finance. It is designed to give you the cash you need to buy inventory or stock from a supplier.

How does it work?

Trade finance generally works on a confirmed order basis. If you’ve got a purchase order from a customer, trade finance enables you to buy the stock or inventory you need to fulfil that order. It usually means the goods can be shipped as soon as possible, and you won’t be left out of pocket while waiting for your customer to pay.

Because it’s based on purchase orders, trade finance is sometimes called purchase order finance or import finance. You may have domestic customers, or some in the UK and some abroad — if you’re importing or exporting, trade finance could help.

Some lenders use trade finance as an umbrella term for various products designed for businesses that trade internationally, such as invoice factoring, supply chain finance, import finance and export finance. When we talk about trade finance at Funding Options, we mean the specific type of funding for paying suppliers.

Trade finance vs supply chain finance

Trade finance is sometimes confused with supply chain finance. This is an easy mistake to make, because trade finance helps you fund the beginning of your supply chain — however, supply chain finance is actually a different type of business lending that buyers offer to their suppliers, and doesn’t apply here.

Example

Joe’s Clothing Company has been selling clothing in the UK for a few months and the brand is getting popular. Joe’s products are spotted by a major department store, who place an order for 1,000 units. It’s a great opportunity to get the product on the shelves of one of the nation’s best-known department stores.

The problem is, Joe has only been selling a 100-200 units per month until now, and doesn’t have enough cash in the bank to pay his supplier for such a big order. The customer and supplier are both established businesses, so Joe can approach a trade finance lender.

The trade finance partner looks at Joe’s purchase order from the department store, and carries out the standard due diligence. Once they’re satisfied they’d like to work with Joe, they order the products from the manufacturer.

With trade finance in place, Joe’s supplier is paid sooner than normal, so the products can be shipped sooner. The supplier invoices the trade finance company for the shipped goods, then once the department store pays the trade finance company, Joe gets the profits minus their fees.

Advantages

In the above example, trade finance would be equally suitable if Joe’s manufacturer were based overseas and his customer were based in the UK.

In both cases, the trade financier acts as liaison between the supplier/manufacturer and retailer/end buyer, which means Joe can grow his business without needing a big reserve of working capital — whether he wants to import, export, or both.

Trade finance can also sit alongside any existing finance your business has, like invoice factoring or asset finance.

Trade finance with invoice finance

As we’ve seen in the example above, businesses like Joe’s can have two cashflow problems. The first cashflow problem is the delay between paying suppliers and receiving stock. The other is the delay between shipping goods to your customers and getting paid via invoice.

Trade finance is designed to solve the first of those two issues — and invoice finance can solve the second.

If it takes two weeks for your goods to arrive from the supplier, two weeks to get them to the customer, and then your customer pays you on 30 day terms, you’ll be out of pocket for two months before being paid. Trade finance takes the supplier payment delay out of the equation, but you’ll still have to wait to get paid by your customer.

With invoice finance in place as well, you’ll get most of the invoice value as soon as you invoice your customer — so you can repay the trade finance lender earlier. You could get trade finance and invoice finance with separate lenders, or packaged into one with the same lender for simplicity.

But it’s important to note that you don’t have to have invoice finance — you can just have standalone trade finance if that’s a better fit for your business.

Companies and providers

There are lots of trade finance providers on the market. Generally, the mainstream banks such as HSBC and Barclays only work with well-established businesses with turnover in the £millions, so they’re not an option for smaller firms. These larger lenders, including large independents like Bibby, will only offer trade finance when combined with invoice finance.

However, there are lots of lenders offering trade finance, invoice finance, or a combination, including Woodsford Tradebridge, Aldermore and Ultimate Finance. With these providers, you may have the option to choose whether or not you’d like invoice finance included.

There are also a few specialist lenders that only offer standalone trade finance. This category includes companies like Goldcrest and Senaca.

If you’re looking for the right trade finance lender for your situation, make an application or get in touch, and we’ll help you find the best option quickly.

Eligibility and criteria

There are two key questions to ask to find out if trade finance is right for your business:

  • Have you got a purchase order you need to fund?
  • Do you want to import or export products for resale?

If the answer to these questions is yes, trade finance could help you grow your business. And trade financiers aren’t as concerned about what’s on your balance sheet as mainstream lenders — what they really want to know is: "what’s the transaction, how much will it grow your business, and who else is involved?"

Trade finance is generally for companies that have good supply chains and end-buyers, but don’t have the working capital to go it alone.

Interest rates

The interest rates for trade finance are usually between 1.25% and 3% per 30 days. Generally speaking, the larger the order, the lower the rate you’ll pay. The cost of finance will also depend on the supplier and buyer you’re working with, because they both affect the chances of something going wrong.

Another factor that affects the cost of trade finance is credit protection. Credit protection means the lender will be liable for the loss if your customer doesn’t pay, so it adds to the cost because of the extra risk. However, some businesses will find this extra cost is worth it for peace-of-mind.

Finally, it’s worth remembering that having invoice finance alongside trade finance may add to the overall cost — so although it's a good option for some businesses, it’s not necessarily the right option for everyone.

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