Brian Duffy is Asset Director at Haines Watts Finance and guides you through the best ways to fund international trade
Trade finance is the financing of international trade flows – it makes import and export transactions possible for companies ranging from a small business importing for the first time from overseas, to larger corporations importing or exporting large amounts of goods around the globe.
Many companies struggle to pay for large purchases especially when buying goods from overseas. Businesses importing goods often need to pay suppliers upfront which can create cash flow pressures making it difficult to meet their customer delivery schedules.
The importance of trade finance
Trade finance can mitigate risk throughout the life cycle of a transaction so it can be an important tool for businesses looking to increase their output and relieve cash flow issues often associated with trading abroad.
Trade finance provides working capital to pay suppliers at the time the goods are shipped, providing funding for the period until payment is received from customers.
How trade finance can aid your business
Trade Finance works by helping a range of businesses to purchase goods from suppliers, both overseas and here in the UK. Clearly every business is unique, so trade facilities can be tailored to match the client’s seasonal trading pattern, as well as their future growth.
For those who are wondering what is trade finance and how it works here is the usual process companies will go through to obtain trade finance:
Place your order with your supplier
Lender pay’s your supplier against shipping documentation, or open letter of credit for up to 100% of the purchase price of the good
The goods are shipped and delivered to the UK
You repay the transaction, either:
within 90 days from the transaction date
Or through one of our Invoice Finance facilities, based on the value of the invoices raised to your customers for the goods
What’s the difference between trade finance and stock finance?
Trade finance is sometimes commonly confused with stock finance but it is important to understand how they are different. Stock finance allows companies to purchase stock they otherwise would not be able to afford. How much funding you can access depends on the type of stock you are looking to release cash against, be it raw materials, work in progress or finished goods, but it can be extremely valuable at helping to improve a business’s cash flow. Stock finance is most common when there is the requirement to hold stock short term prior to sale; thus there will not necessarily be a purchase order from an end customer.
What is the difference between trade finance and structured trade finance?
Structured trade finance products are used primarily in the commodity sector by traders, producers and processors. Markets within the structured trade finance arena include mining, energy and soft commodities. These markets often require more complex finance arrangements, which is when a structured trade finance deal can come into play.
Brian Duffy is Asset Director at Haines Watts Finance