Trade Finance can help New Zealand businesses successfully plan the importing of their first consignment of goods.
While the process of getting set up in the import/export industry can be more difficult than you initially realised, the right Trade Finance package can be just the solution you need.
According to the World Trade Organisation, 90% of world trade depends on a form of trade finance to do business. Here in New Zealand, even a quick scan at recent statistics relating to the increasing amount of imports and exports underscore just how important it is to maintain a strong trade industry.
Trade Finance: What is it?
Trade finance is an umbrella term used to refer to any number of financial products that help facilitate seamless, reliable and fair trade between different businesses. These finance facilities give companies access to the funding they need to either sell the goods they are producing or buy the goods they need, all the while mitigating the inherent risks involved in trade and transactions.
In other words, trade finance sets up a reputable third party to act as a middle-man of sorts to usher the financial transaction through.
How does it work?
Trade finance is designed to increase liquidity in a business. In other words, to improve the ‘movability’ of a business’s money.
Both the buyer and the seller can increase liquidity through access to this third party.
The Seller – The company selling the goods can maintain working capital through an adjoining financial facility such as invoice finance, with peace of mind that payment for the goods provided will be settled. It’s a guarantee that they will be paid.
The Buyer – The company purchasing the goods enjoys peace of mind knowing that the goods ordered and paid for will be provided to them as agreed. They have reassurance that they won’t be losing money by paying for a shipment that is not delivered.
How does it mitigate risk?
By ensuring a sufficient supply of cash flow, risk on both sides of the transaction can be reduced.
In any transaction there are conflicting needs. The buyer wants to receive goods before needing to make the payment while the supplier wants to receive payment before providing the goods. Neither party wants the risk of having spent money without being compensated. Trade Finance facilitates the transaction so that both needs can be met without the risk of non-delivery.
For example, a Letter of Credit can be issued to reassure the buyer that the third party will settle payment even before delivery of the goods is made, and this works the other way as well.
Trade finance can and is used to help a business smooth over disruptions in cash flow but it is more commonly used to manage the risks involved in both domestic and international trade.
Trade Finance: What are the different options?
There is actually more than one type of trade finance. Each facility comes with its own benefits and advantages depending on the requirements of the business in need of trade support.
Make sure to speak to a lending specialist at your nearest ScotPac New Zealand office to find out more about which trade finance option is right for you.
1. Letters of Credit
Letters of Credit work to mitigate the risk involved in trade. The third party financier issues the letter to guarantee payment (according to specific conditions). This way, the buyer knows the goods are being manufactured and delivered before payment is made and the seller has assurance that the money will be provided when the goods are.
2. Payment in Advance
Sellers will often require a down payment before manufacturing or producing ordered goods. The payment in advance facility is thus a helpful option for many businesses. The financier will provide a revolving line of credit to ensure the supplier is paid, generally for terms lasting up to 120 days. This means that the buyer can purchase and even sell those goods before being required to settle the outstanding payments.
3. Payments Against Documents
In this form of trade finance, the financier (and importer) may require specific documentation to be provided. These documents evidence that the goods have been shipped before payment for the products is made. Suppliers may provide a bill landing or similar document to the third party facilitating the transaction which, after verification, will allow payment to be transferred.
4. Import and Export Finance
Import finance is a trade finance solution for businesses looking to purchase goods from overseas suppliers. If funds cannot be accessed independently, the facility will provide a line of credit for up to 180 days.
Using the money owed in outstanding customer invoices, the importer can then fund the purchase of the imported goods and repay the amount borrowed.
Export finance assists the seller in an international translation. The exporter is given access to working capital through the facility so that they can maintain cash flow while filling the order from the importer. The accounts receivable act as collateral for the financier to provide access to the required line of credit.
This means that the seller can take on new orders and continue its operations without having to wait for the payments from overseas customers to clear the transfer process.
Does your business need Trade Finance?
Trade Finance can provide advantages for a range of businesses. If you’re looking to procure goods, this financial solution can ensure there is no gap in your operational working capital. As your operations grow and expand, having access to a reliable line of credit to continue funding required investment without disrupting cash flow is invaluable.
For businesses looking to sell goods, the extended payment terms can result in disruption to working capital as well, inhibiting the ability to manufacture, ship and deliver products. Trade Finance provides access to otherwise locked-up capital and allows the facilitation of the supply side of the trade agreement.
Customised Finance Solutions
Every business has different needs and operates under different circumstances. Trade Finance can be customised by the team here at ScotPac to ensure the terms and arrangements work for the needs of your business. Moreover, with a wide breadth and depth of financial products available as well, as seamless and productive a trade as possible can be assured.
The benefits of Trade Finance
1. Mitigating Risk
As mentioned above, Trade Finance ensures that businesses seeking to transact with each other can do so with greater peace of mind that there is less risk involved.
2. Ensuring Cash Flow
Funding facilities ensure companies have access to the working capital they need to grow, trade and meet their operational expense requirements.
3. Fund Expansion
Growth can be a challenge for SMEs but with a practical, customised financial facility, the right line of credit can be provided to help fund sustainable expansion.
Explore the right Trade Finance option for you with ScotPac
ScotPac works with clients as partners, and not as transactions. That’s why we offer unrivalled capability in finding flexible and customised Trade Finance solutions to ensure our clients’ businesses thrive.