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Receive funding in just a few business days after providing the required information - allowing you to take on more business.
What is trade finance?
Also known as purchase order finance or supplier finance, trade finance means a lender will fund your supplier upfront based on confirmed orders. If you buy or sell goods internationally, you may find your cash flow is often strained as you could wait long periods for payment. This could inhibit your ability to take on large orders or expand your business, without the cash flow to purchase large amounts upfront. Trade finance allows you to deliver on orders that are outside your normal capacity to fund by providing you with either a deposit or payment for the goods or materials upfront which you repay at a later date.
How does trade finance work?
Trade finance loans play a critical role in enabling businesses to buy and sell goods and services across borders. Here's how trade finance loans generally work:
- The trade process begins with a buyer importer identifying a seller exporter for the goods or services they want to purchase. Both parties agree on the terms of the transaction, including the price, quantity, delivery date, and payment method.
- The buyer issues a purchase order, outlining the details of the transaction, which serves as a formal offer to the seller. The seller reviews the purchase order and agrees to the terms.
- The business applies for a trade finance loan. The lender will assess the creditworthiness of the borrower and evaluate the risk associated with the trade transaction. They may also consider the creditworthiness of the foreign buyer or supplier. If the lender is satisfied with the assessment, they approve the trade finance loan.
- Once approved, the trade finance company disburses the funds to the borrower or directly to the foreign supplier, depending on the specific trade finance arrangement
- The transaction is completed according to the agreed upon terms and the supplier ships the goods or services.
- The borrower repays the trade finance lender in full, generally once the they have either been paid by the foreign buyer, or by their customers, depending on the circumstances.
Advantages and disadvantages of trade finance
Advantages of trade finance
- Allows businesses to fulfil larger orders or purchase more inventory,
- Manages cash flow effectively
- Can build and strengthen relationships with suppliers by ensuring timely payments
- Helps to help mitigate risks associated with international trade, such as non-payment by the buyer
Disadvantages of trade finance
- There are fees and interest charges involved with trade finance, which can increase the overall cost of a trade transaction
- Now all businesses may be able to access trade finance, as banks and trade finance companies may have stringent requirements, such as a long trading history and a good business credit score.
How can I use trade finance for my business?
A frequent situation for many small businesses is that they need help with fulfilling customer orders, which they do not have the cash available in the bank to fund. Working with a trade finance provider can help to pay for the goods, typically based on an order. The lender either raises a letter of credit for you or pays a deposit on your behalf to supplier(s). They can also take care of things like documentation, insurance and collecting money from your customer.
What are the types of trade finance?
There are a range of trade finance products that can help facilitate international trade transactions. These include:
- Letter of credit: in a letter of credit (LC), the lender guarantees payment to the supplier upon presentation of compliant shipping documents. The lender essentially takes on the credit risk, and the importer (buyer) reimburses the lender later.
- Trade credit insurance: some businesses purchase trade credit insurance to protect against the risk of non-payment by their foreign customers. This insurance policy can cover losses if the customer defaults.
- Export factoring: export factoring involves selling accounts receivable (invoices) to a factor (financial institution) at a discount. The factor advances a portion of the invoice value immediately, providing cash flow to the exporter.
Supply chain finance vs trade finance
Supply chain finance and trade finance are both financial products used in the context of trade, but they serve different purposes. Trade finance primarily deals with facilitating the import and export of goods by providing finance to mitigate the risks associated with cross-border transactions. On the other hand, supply chain finance focuses on optimising the cash flow within a supply chain, often involving the extension of payment terms to suppliers or early repayment discounts for buyers. While trade finance supports the transaction itself, supply chain finance aims to improve the overall efficiency of the supply chain.
why use trade finance
Secure more orders with trade finance
Trade finance is a popular and proven method of allowing SMEs to increase their business and trade confidently. Capitalise partners with selected and experienced trade finance lenders to help you maximise your trading abilities. Advantage of working with Capitalise include:
Who is trade finance for?
Businesses exporting globally or businesses taking on big orders. A frequent situation for many SME's, brands and importers is that they need help with fulfilling customer orders, that they as a business cannot fund. Working with a trade finance provider can help to pay for the goods, which is typically based on an order. The lender either raisers a letter of credit for you or pays a deposit on your behalf to supplier(s). They can also take care of things like documentation, insurance and collecting money from your customer.
300+ lenders in the market.
Find your match.
Capitalise uses a little funding magic to help match the most appropriate trade finance partners to your business. Enter a few business details and we'll match your criteria with lenders from our network. From our approved shortlist, you select the lender that is right for your business. You can even invite your accountant or adviser to contribute to your application. We'll keep you updated on the progress of your application along the way.
Or call us on 020 3696 9700. We're happy to help!
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Frequently asked questions about Trade Finance
The primary benefit is that it allows you to deliver on orders that are outside your normal capacity to fund. Payment is fast, just a few business days after providing the required information, which can allow you to take on more business. And since the deal is transactional, you'll just need to show a confirmed purchase order from a well-rated retailer or a history of sales instead of extensive financial information about your company.
Trade finance can cost 5-10% of your margin, so you'll need a gross margin of at least 20% for it to make sense to use. However, there are several lenders who specialise in this form of funding and offer competitive rates, which can make it surprisingly cost effective.
Be sure to get the right lender. Going to your local bank or some random lending institution can result in significant delays, unfavourable terms and, ultimately, rejection. Using a lender who specialises in trade finance can make the process incredibly fast, simple and rewarding. You'll also need to demonstrate that you're an established business by showing current orders or historical web-based sales of the past 12 months or more. And since the lender needs to manage their risk, you'll need to sign a personal guarantee.
Import finance is another name for trade finance, a type of funding used to manage the risks and costs associated with importing goods or services internationally.
Yes, trade finance can help you with various aspects of international trade, such as financing the purchase of goods, managing currency exchange risk, obtaining letters of credit, and ensuring the smooth flow of goods across borders.
The difference between trade finance and invoice finance is that trade finance focuses on facilitating international trade by providing funding for the purchase of goods and services, managing currency exchange risk, and ensuring the smooth flow of goods across borders. Whereas invoice finance involves using unpaid invoices as security to access cash. This helps businesses manage their working capital by advancing a percentage of the invoice value before customers pay.