This financial product lets a business strategize and prepare for international trade. It covers a broader definition of funding options companies employ to go ahead with trading abroad. These are feasible options when it comes to importing, exporting, and domestic trade.
Businesses encompass this financing option for successful trade transactions. Suppose you are running a venture in the UK, and the manufacturer is based overseas. Here, a trade finance loan company will act like a bridge between you and the other party.
It does not matter if you opted for other business funding types. Having this financing option is possible in this situation despite the presence of options like invoice factoring or assets finance. The different scenarios where they provide the best financial support are:
As an importer – For an importer, the money stuck in shipping goods gives an unpleasant feeling, as they cannot use it other ways. This funding lets you breathe a sigh of relief.
As an exporter – When you export something, you must wait to receive the final payment after the products reach their destination. This funding option keeps you immune from situations when the payments from the importer are still pending.
Trade finance empowering your business
The reason behind the evolution of trade finance is to reduce the perils a business faces while going ahead with international trade. The biggest of them are payment risks, i.e. non-receipt of payment from the other end. Some of you might have to deal with currency fluctuations, shipment delays, credit risks etc.
Therefore, critical situations are going to be myriad. This financing option steps in to make trade dealings more secure for businesses. When you opt for this financing, you will receive something like a letter of credit, trade guarantees, and documentary collections that make sure about the delivery and payment to testify the transaction.
Multiple queries can pop up in your mind regarding trade finance. Check if some of them are from the below points.
1. What are the different types of trade finance?
No need to worry about the size of your business. This funding is a perfect fit if your company deals in export and import. Most importantly, you must be planning to take your business overseas.
They are a reliable form of funding to maintain cash flow during international trade. Approximately, it takes care of 80% of the global trade. The common type of trade finance products are:
Letter of Credit: This is the commonly used financial instrument of trade finance. It mentions the pledge of the importing client, who will complete the payment with the help of the bank. It works both for the buyer and the seller. The commercial letter of credit secures the export or import credit on agreed terms and conditions.
Purchase Order Finance: It covers the pre-shipment problems that might bother any small business. You will receive capital to complete the payment of suppliers along with verified purchase order. Therefore, handling cash issues becomes easygoing even if you are looking forward to accepting a big order.
Supply Chain Finance: This financing option intends to protect the supply chain process which happens between buyer, seller, and financial institutions. A flexible payment schedule makes the financial dealings of the buyer more convenient. Immediate payment issuance is possible once you unload the products.
2. Who can make the most out of this financing option?
In the supply chain system, you cannot always believe in the other participants’ dealings. To downsize the various risks and help you purchase raw materials and stock, the role of this financing option is unparallel.
They provide your business with the support to free up the capital that you want from stocks or receivables for the growth and development of your company. This funding gives you the confidence to place a big order with the supplier without worrying about stuck payments.
The growth goals might be different for SMEs, big companies etc. However, this financing option succeeds in helping them cover the desired trade targets of any organization. At times, government rely on these types of finances.
Small-sized business often goes through loan rejection because of weaker balance sheets. These finances help them overcome this setback. Businesses must go for the right trade finance structure to leverage its benefits completely.
3. What is the relationship between trade and invoice finance?
Trade finance falls under the category of working capital loans in the UK. It comes into action once the confirmation about the order reaches you from the receiving end.
You will typically receive a purchase order. It will help you obtain funds to carry out the purchasing of inventory necessary to complete the order.
Here, the relation between trade and invoice finance is that they both are forms of working capital finance. The coverage you can expect with the former option is wider than the latter one.
The first option gives you the opportunity to perform business operations even if you have not received payments from clients after delivery. They can plug the funding gap but not the period you will have to wait till the final payment from your customer.
4. How are they different from bank loans?
The stringent terms and conditions are the biggest difference between this financing option and traditional loans. You can expect more flexibility in handling trade transactions with the help of funding.
On the other hand, bank loans will take a lot of time for the processing purpose. The documentation part will also be huge, as the mainstream lenders will enquire about many details and documents.
The bottom line
Is the trade finance gap a serious matter? Due to the suitability factor, the demand for trade finance is huge. However, not every business gets acceptance for this funding.
The figure showing the gap between the demand and success of approval signifies the trade finance gap. It is becoming wider with the number of rejected applications. The low-risk aspect of this funding option makes them the perfect companion for any business aspiring to trade globally.
This funding option depends on the transactions you have with your clients. They help in ensuring the advancement of your business.
Gary Weaver is a Senior Content Writer with having an experience of more than 8 years. He has the expertise in covering various aspects of business market in the UK, especially of the lending firms. As being the senior member, he contributes a lot while working at TheBusinessFunds, a reputed business loan broker.
Gary performs the major role of guiding loan aspirants according to their financing needs and also to write research based blogs for the company’s website. Previously, he has worked with many reputed business firms and therefore, he knows every nook and cranny of business financing market of the country. Gary is a post-graduate with having a degree of Masters in English language. He has also done post-graduate diploma in Business and Finance.