Trade Finance

RED: ‘Safer’ deal but can make transactions less profitable than they might be with cash only
AMBER: Options vary based on your businesses’ trading role in the supply chain
GREEN: Create stability, ensuring exporters and importers get what they expect to receive

I run a small business that’s just starting to work with overseas suppliers. I’ve been told I should look into my ‘trade finance’ options. What does that mean?

The term ‘trade finance’ covers a lot of territory. It can include things like finding ways to access cash while you’re waiting for payments for your first international exports, protecting your transactions with bond and export insurance and providing better protection for both importers and exporters through letters of credit.

Simply put, trade finance ensures that exporters are paid for meeting the terms they agree with buyers, and that importers receive the goods they paid for on the terms they agree with suppliers.

Trade finance services can be provided by a range of organisations, from banks and buyers to government agencies and specialised financial service providers and of course a number of alternative lenders, some of whom can be accessed via our Funding Finder

Aha . . . so there are different types of finance options depending on what kind of trade I’m doing? How do I find the choices that are right for me?

Correct. You’ll have different needs according to where you sit in the trading supply chain. For example, you say you work with overseas suppliers, which means you import goods into your local market from elsewhere. That means your main concerns include finding the easiest and least costly ways to handle payments to your overseas suppliers and ensuring that you get what you pay for in the timeframe you expect.

Exactly. So how can I do that and who can help?

One way to reduce risks and make sure both importers and exporters stay happy is by obtaining a letter of credit, usually from a bank. For importers, a letter of credit clearly spells out what products they are paying for and how much they are paying. The letter will also specify the shipment and delivery terms that must be fulfilled by the supplier.

Letters of credit provide different reassurances for exporters, specifying the supplier’s terms of payment and guaranteeing that payment will be fulfilled upon delivery.

OK. So what other options should I be looking into?

As someone who’s importing goods from overseas, you want to make sure you can negotiate the best prices and, if possible, spread your payments out over a convenient time period. Specialist finance providers can help with this.

A provider can find you funding to cover the upfront expense of imported goods until you can deliver them to local customers and recoup your purchasing costs.

Here’s how it works: Once you have local purchase orders in hand, you order the goods requested from your overseas supplier. You then provide your details – goods, costs, suppliers and shipping/delivery terms – to a specialist that can help fund the transaction. If it approves your request, the specialist provider will send the funds to your supplier and set the shipment in motion. The overseas supplier is paid upon ordering, but you don’t have to lay out funds until your customers pay you.

Are there other types of trade finance I should know about?

Of course, if you ever decide to start exporting goods to other markets yourself, you might also need export finance. This can provide you with direct loans, working capital or letters of credit to ensure a healthy flow of cash to your business until your overseas buyers pay for orders, which can take 90 days or more.

Just as specialist providers can help importers cover the cost of international orders until those goods are sold domestically, they can provide similar types of financial support to small-business exporters.

Exporters can also get financial support through a service called factoring. This involves working with an invoice finance facility that provides upfront payments to exporting businesses waiting to receive payment from overseas customers. Once an invoice is submitted to a customer, the finance provider will advance a portion of the total sale price directly to the exporter in as little as 24 hours. The provider then handles collection of the full balance from the overseas customer, and pays the remaining portion – minus a fee – to the exporting firm once final payment is made.

So are banks or specialist financial services my only options for trade finance?

Not at all. Chambers of commerce, industry associations, government agencies, such as UK Trade & Investment, and even other businesses also work to promote international trade through networking, mentoring, business-to-business support and other programmes. As I said above, have a look at our Funder Finder too, because we work with some of these lenders.

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