An introduction to trade finance
What is trade finance?
Trade finance is the term used broadly to describe the different types of funding available to facilitate international trade and commerce including the import and export of goods and services. Trade finance products can help to reduce or mitigate the risk of international trading.
Who uses trade finance?
Whether you are exporting or importing goods, trade finance can help to ensure the business providing the items receive payment, and that conversely the customer receives the required quality and quantity of items.
What is the risk of international trade?
While many business transactions encounter an element of risk, trading overseas can create additional risk factors simply because of the logistics involved in international trade.
Corporate risk of International trade
Other countries may have different ways of conducting business and it may not be as easy to build the same level of knowledge and confidence in dealing with a company in another part of the world – while you will undoubtedly use web research to locate and contact a suitable business to work with, followed by Zoom meetings to reach an agreement, it may be difficult to undertake the same type of credit checks and due diligence that you would with a UK trading partner. Trade finance products can help to overcome some of these challenges.
Country risk of international trade
In some instances, a country may provide new opportunities for international trade, but there may be wider issues such as political uncertainty, a weak economy or different legal requirements which may create additional risk factors for undertaking international trade. These will need to be considered as part of your risk evaluation when entering a business agreement, but trade finance can help to mitigate or reduce risk in some areas.
Payment risk
Ensuring you are paid on time and in full, or conversely receive the right quality and quantity of goods are the key concerns surrounding international trade. Trade finance can, in many instances, guarantee payment when selling or buying overseas.
What are the different types of trade finance?
Trade finance is a specialist area of commercial funding and Complete Commercial Finance has the knowledge and expertise to help you navigate the right type of funding for your overseas business trade. Here are some of the common trade finance products which you might consider.
Letter of credit
At its simplest, a Letter of Credit – also known as a Supplier Undertaking – is a pledge issued by a bank on behalf of an importing client to make a payment within an agreed timeframe so long as the goods supplied meet certain terms and conditions (usually surrounding quality and quantity). A Letter of Credit reduces the risk of non-payment, overcomes the challenges of organising a foreign currency transaction. Attached to this, Letter of Credit Discounting allows an exporting company to receive funds as soon as a Letter of Credit is in place with a buyer by releasing funds, less the agreed lender’s fee, to pay suppliers or progress with other business.
Bonds, Guarantees and Indemnities
With a wide range of products available, these type of trade finance products demonstrate a clear financial commitment to supply goods or services to agreed terms and a company’s financial credibility. Available for the lifetime of a contract, bonds and guarantees can be issued in a buyer’s local currency making a transaction easier and improving a company’s ability to negotiate a favourable deal.
Trade loan
A trade loan can be used to help a business to fund regular or a one-off purchase over the short- or long-term. Bridging the gap between orders and payments, a trade loan can be uniquely agreed to work with a business’ trading cycle and often reduce overall borrowing costs. By broadening your overdraft facility with a trade loan, you may be able to borrow more and reduce the pressure on your business’ cashflow.
Why use trade finance?
It is often said that businesses which trade overseas have a 25 per cent higher profit margin, largely because by trading directly they eliminate the ‘middle man’ and take the revenue which they would otherwise take. By trading directly with an overseas company, there is more exposure involved but trade finance can help you to take control and to reduce or eliminate the risk. By working with Complete Commercial Finance’s experienced team at the outset, we can help your business to navigate the wide range of trade finance products and find the best solution to your overseas business plans.
Case study: Import of agricultural equipment, King’s Lynn, Norfolk
A Norfolk agricultural business had previously used asset finance to purchase equipment in the UK but had the opportunity to buy further equipment at an advantageous rate overseas. However, it could take up to six weeks to receive the goods leaving the company exposed with a reduction in working capital and the risk of receiving goods which were below standard. A trade loan and guarantee reduced the risk of trading with an overseas manufacturer, ensuring the transaction progressed smoothly and ensuring that the company was satisfied with an important capital investment for the business.
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