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Bridge the Cash Flow Gap with Trade Finance 

There is no dark art or secret magic to trade finance.

Paul Surtees in trade finance
Nov 17

With trade finance, you are basically using your purchase orders to get funding.  There are a number of lenders out there who will buy the stock you need and take care of all the admin hassle, freeing you up to run your business and make more money.  Here are some commonly asked questions about trade finance:  

 

WHAT EXACTLY IS TRADE FINANCE? 

Trade finance has often been surrounded in mystery where only a handful of businesses seemed to be able to conjure up deals, but the industry has dramatically changed, making it incredibly simple to obtain financing.  Basically, a lender buys the stock you need to fulfill your orders and takes care of all the related administrative details to free you up to run your business (and secure more orders).  It's an ideal cash flow strategy for the wholesale fashion industry, allowing brands to quickly pay suppliers and fund the credit period of retailers.

 

WHEN IS IT GOOD TO USE TRADE FINANCE? 

Here is an ideal scenario. . .a customer places an order that you cannot fund, a frequent situation of many brands and importers.  The supplier can't offer favourable terms, so you are in danger of not being able to deliver the order.  You contract with a trade finance provider to pay for the goods, which is typically based on the order, not the invoice (finance based on the invoice is a slightly different finance arrangement).  The lender either raises a letter of credit for you or pays a deposit on your behalf to your supplier(s).  They also take care of things like documentation, insurance and collecting money from your customer, which allows you to just sit back and wait for the profits to arrive.

 

WHAT'S THE DIFFERENCE BETWEEN TRADE FINANCE AND INVOICE FINANCE? 

Invoice finance gives you access to the money that is owed to you by your business customers.  It allows you to draw funds against your sales before the invoices have actually been paid.  Expanding on the example above. . .

You receive an order from a customer and in order to fulfil that order, you work with your suppliers.  In order to pay your suppliers, you could use a trade finance provider who will pay for the goods based on the order - that's trade finance.  Your order arrives, which gets sent to your customers and now it's time for you to send invoices to your customers.  There might be a delay between when the order gets shipped and when payment is received so an invoice finance provider can help bridge that cash flow gap.  There are a number of lenders who offer both trade and invoice finance, making it easy to finance all aspects of the supply chain process.

 

WHAT ARE THE ADVANTAGES OF TRADE FINANCE? 

The primary benefit is that it allows you to deliver on orders that are outside your normal capacity to fund. Funding is also 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 order from a well-rated retailer or a history of sales instead of extensive financial information about your company.

 

ARE THERE DISADVANTAGES?

Trade finance can cost 5-10% of your margin, so you'll need a gross margin of at least 20% for trade finance to make sense for your business.  However, there are several lenders who specialise in this form of funding and offer competitive rates, which can make it surprisingly cost effective.

 

WHAT ARE SOME 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 A BUSINESS SOURCE TRADE FINANCE? 

There are a number of lenders who specialise in trade finance.  As a funding comparison site, we make it easy for businesses to choose from over 60 lenders including high street banks, independents, challengers and alternative finance.  

You'll 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.  At Capitalise, we can facilitate personal guarantee insurance, if applicable, through our partnership with PKF, a global accounting network.

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