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trade finance

Bridge the cash flow gap with trade finance 

Ollie Maitland Nov 17, 2016

If your business needs to plug a cashflow gap between paying your supplier and getting paid, trade finance could be the right option for you.  

Here’s some frequently asked questions about trade finance: 
 

What is trade finance?

Trade finance is a type of business loan that helps facilitate trade by providing funding to importers and exporters.
Trade finance operates through confirmed orders, allowing businesses to purchase the necessary inventory or stock to fulfil a customer purchase orders. 
This enables goods to be shipped promptly, without leaving the business out of pocket while waiting for customer payment. 
Trade finance is also referred to as purchase order finance, or import finance, since it’s centred around purchase orders. This financing option is suitable for businesses that have customers both domestically and internationally, and are involved in import or export operations.

 

When to use trade finance?

Trade finance is for any business that buys and sells goods.

You may want to opt for trade finance if a customer places an order you cannot fund. 
Or if the supplier can’t offer favourable terms and you may not be able to deliver the order. 

If you import, export, trade or manufacture and are looking to mitigate the risks and challenges of cross-border transactions, then trade finance could be a good fit for you.
 

What's the difference between trade finance and invoice finance?

Trade finance and invoice finance are both types of financing that are used by businesses to manage their cash flow, but they differ in several key ways:

  • Trade finance is used to finance the import or export of goods, while invoice finance is used to finance a business's accounts receivable, or unpaid invoices. 
  • With trade finance, a financial institution may provide a range of services, such as letters of credit or trade guarantees, to help facilitate the purchase or sale of goods between two parties. This type of financing is often used by businesses engaged in international trade.
  • Invoice finance involves the sale of unpaid invoices to a financial institution, which then advances a percentage of the total value of the invoices to the business. This allows the business to receive cash quickly, rather than waiting for customers to pay their invoices on the standard payment terms
  • Invoice finance is typically used by businesses that have a high volume of unpaid invoices or long payment terms, as it can help them manage their cash flow more effectively.

 

Advantages of trade finance

  • Allows you to deliver on orders that are outside your normal capacity to fund
  • Access funds fast - from application, you could receive funding in a few days, allowing you to take on more business
  • Minimal information is needed, the core information needed is a confirmed order or a history of sales
  • Suitable for businesses that might not be profitable and can’t access other forms of finance

 

Disadvantages of trade finance

  • Can cost 5-10% of your margin, so you’ll need a gross margin of at least 20% 
  • New companies may find it difficult to access trade finance due to preference for businesses with a proven track record of reliable operations and timely repayments. 
  • If payments are not made on time, it can result in high costs for the borrower.

 

Things to consider with trade finance 

Be sure to get the right lender. Going to your local bank or inappropriate 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.

 

How can I get trade finance?

There are a number of lenders who specialise in trade finance.  
With access to over 100 institutional lenders, we make it easy for you to find the most suitable one for your business.

When you’re ready to get started, search and compare trade finance lenders for your business.

 

Updated: 05/06/2023

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