May 28, 2021 12:00 PM

A Guide to Trade Finance

Do you find your business is unable to grab hold of opportunities due to cash flow challenges? Do you struggle to manage the time it takes for your stock to arrive despite the fact that you made payment to your suppliers weeks, or even months ago? What is trade finance, how does it work, and what are the benefits? Read on to find out.

What is Trade Finance?

Trade Finance refers to a group of financial products that provide credit to businesses, facilitating the buying and selling of goods and services.

A third-party lender acts as an intermediary that can assist both importers and exporters. It ensures that an exporter receives fast payment for their goods. At the same time, an importer receives extended credit and a guarantee that the goods are shipped. It also enables exporters and importers to manage currency fluctuations with competitive exchange rates.

Small businesses, in particular, may not be able to afford to wait for their exported goods to arrive at their destination to receive payment. And importers may not be able to afford to pay for goods so far in advance.

Trade finance helps keep the flow of goods and services running worldwide, even when businesses lack the cash flow to complete trades.

Most people associate trade finance with international exports and imports. But it also has advantages when buying or selling locally.

The third-party financial institutions involved in providing trade finance include:

  • Banks
  • Specialist trade finance companies
  • Export credit agencies
  • Export service providers
  • Types of Trade Finance

There are several different types of trade finance facilities that businesses can use to complete transactions. They act as a form of small and medium enterprise (SME) lending when traditional lending may not be available. A finance broker can advise small businesses on the best type of finance for their needs and put them in touch with the appropriate lenders.

Credit Lines

Lines of credit are short-term revolving loans that buyers and sellers can use to fill gaps in financing. They can continue to trade without interruption. The loans are typically unsecured and can be arranged ahead of time.

Banks can issue lines of credit to exporters as well as importers. The exporter receives payment when they ship the goods, and the importer repays the bank over a set period.

Letters of Credit

Banks issue letters of credit after assessing a buyer's credit risk. The documents guarantee the seller will receive payment in full as soon as they complete the shipment. If the buyer fails to make the payment, the bank must cover it. Letters of credit also protect the buyer as the seller has to meet the terms of the deal to receive the payment.

Letters of credit are used in domestic trade as well as imports and exports.

Factoring

Also known as debtor financing, factoring allows businesses to sell their accounts receivable to a third party in exchange for cash. There is typically a 10-20% discount on the value of the invoices. The business receives the cash right away at the reduced rate, rather than having to wait for the invoice date for the full payment. The third party then takes the payment from the customer when the invoice is due. It receives fees of ~1-3%.

Export Credit

Export credit agencies (ECAs) are government entities that provide guarantees to banks for financing, issue insurance to exporters and investors and extend credit to overseas buyers.

Most countries have ECAs in some form. ECAs are an important source of funding in times of economic uncertainty. As government agencies, they can step in when commercial lenders may be more cautious about providing financing.

What are the benefits of Trade Finance?

There are several benefits to trade finance, including:

  • Reduces the risk of non-payment if the buyer is unwilling or unable to pay for financial or political reasons
  • Extends credit when other forms of SME lending may be hard to secure
  • Improves cash flow as funds are no longer tied up for weeks whilst waiting for stock and inventory to arrive
  • Helps protect against the impact of currency fluctuations
  • Increases efficiency of trade by reducing delays in shipping and payment
  • Prevents businesses from losing clients over lack of funding
  • Helps suppliers book more business from buyers
  • Prevents buyers from falling behind on payments
  • Trade finance can form part of a broader supply chain management strategy to help your business thrive.

Improve your Cash Flow with Trade Finance

Trade finance protects businesses against the risks of domestic and international trade. And it provides the cash flow they need for growth.

Moneytech can help your business unlock the benefits of trade finance. Our platform delivers speed and easy administration, allowing you to manage your supply chain efficiently. We work with you to provide a tailored trade finance solution that will enable your business to reach its goals.

Contact us to find out more.

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*This information does not take into account your personal objectives, circumstances or needs. Consider its appropriateness to these factors before acting on it. Read the disclosure documents for your selected product or service before deciding whether to purchase them. ABN: 77 106 249 852 | AFSL: 421414