How can trade finance help my business?
Trade Finance is a working capital solution that can help businesses that import against confirmed orders.
For many businesses obtaining a large confirmed order can be a dream scenario. They can see the profit they will earn and excitement levels rise. This can often turn in to a cash flow nightmare when suppliers want paying upfront. It is often the case, especially in China, that suppliers want paying upfront. That means you may have to pay for your goods, wait 30 days for them to be manufactured and delivered and then have to wait another 30 days to be paid by your customer. Trade finance can be the solution to help you with this cash flow problem.
Trade finance provides your supplier with a payment or a promise to pay on day one which allows them to start manufacturing and delivering your goods. It is a cash flow solution
WHAT ARE THE RISKS?
International trade often takes place between unknown partner in foreign jurisdictions. As such there are various risks to deal with. These include:
Payment risk: Will the exporter get paid for the goods they are manufacturing and delivering. Will the importer receive the right quality goods in the right quality and correct specification?
Country risk: Each country has it’s own specific risks such as political risk or sovereign risk. Relationships between governments can become strained with regards to international trade as we saw with the US and China in 2019.
Corporate risk: What is the quality and financial performance of each party? Do they have a track record of non-payment?
Trade finance can help to reduce these risks benefiting all parties and facilitating cross border trade.
WHAT IS TRADE FINANCE
Trade finance has various definitions, and they can be varied and interesting. It is described both as a ‘science’ and as ‘an imprecise term covering a number of different activities’. Both are correct. In one form it is quite a precise science managing the capital required for international trade to flow. Yet within this science there are a wide range of tools at the financiers’ disposal, all of which determine how cash, credit, investments and other assets can be utilised for trade.
PEACE OF MIND
An exporter wants to know that they will be paid for goods that they are shipping. An importer wants to know that goods paid for will be shipped. The importer’s bank assists by providing a letter of credit to the exporter (or the exporter’s bank) providing for payment upon presentation of certain documents, such as a bill of lading. The exporter’s bank may make a loan to the exporter on the basis of the export contract. The type of document used in the process depends on the nature of the transaction and how evidence of performance can be shown (i.e. bill of lading to show shipment). It is useful to note that banks only deal with documents and not the actual goods, services or performance to which the documents may be relating to.
GET IN TOUCH
If you have received an order that is causing you a cash flow headache please get in touch and talk to us about the most suitable solution. 0845 251 4040