Trade Finance

Trade Finance is a form of working capital; the term commonly refers to the financing of cross-border, import/export transactions.

For an importer, it means receiving funding in order to pay a supplier and allow time for the goods to be received, sold and turned into cash.

For an exporter, it provides working capital until the overseas customer pays for the goods or services that have been delivered.

Exporters typically utilise export factoring or bill facilities as the primary means of financing overseas trading, which may be supported by a letter of credit to secure the transaction

For importers that purchase goods from a supplier with short or no payment terms, Trade Finance will close the cash flow gap, so you aren’t out of pocket.

• More flexible than a traditional business loan or overdraft.
• Maintain working capital rather than having funds tied up while goods and materials are produced and shipped.
• Negotiate bulk buying/early payment discounts with your suppliers.
• Make use of our overseas trade advisors in Guangzhou, China to help ensure the import process runs smoothly from start to finish.
• Fast access to funding. You can buy more stock to fulfil large orders, access supplier discounts or take advantage of seasonal buying and selling cycles.

For export businesses, a trade finance facility can bridge the gap between manufacturing goods and waiting to receive payment from customers.

• Free up capital tied up in the manufacturing process.
• Get paid faster and only repay when your customer pays for the goods.
• Offer upfront payments to secure a discount in exchange for paying supplier’s invoices faster.
• Fast application process without the strict lending criteria associated with a traditional business loan.
• Flexible line of credit that grows with your business.

Trade finance solutions help exporters to build relationships with domestic and international customers. Exporters can maintain a healthy cash flow and speed up sales cycles to accelerate growth.

There are generally four ways to finance a global trade transaction between a buyer and supplier.

Letters of Credit

A letter of credit reduces the risk for both the supplier and the buyer. It guarantees payment to the supplier if certain conditions are met, such as when goods are shipped, or the buyer receives the goods. For the buyer, it ensures that the goods will be manufactured and shipped on time before payment is released.

Documents Against Payments

Documents against payments is a trade finance mechanism where the supplier receives payment in exchange for the shipping documents. It protects the supplier by ensuring that funds are available to pay for the ordered goods and protects the buyer by ensuring the supplier proceeds with the shipment of goods before receiving payment.

Telegraphic Transfer

A telegraphic transfer is one of the most widely used trade finance payment methods. It’s an electronic transfer of funds to the recipient’s bank account. Many suppliers will require advance payment before the manufacturing of goods, and a telegraphic transfer can be used to transfer funds quickly.

Invoice Finance

Invoice finance allows importers and exporters that raise invoices to use their accounts receivables as collateral to boost cash flow. You can receive up to 95% of the value of your outstanding invoices upfront. The remaining balance is released when your customer pays the invoice. This form of trade finance can be combined with other solutions to release capital tied up in shipments and the manufacturing process.

There are four main aspects of Trade Finance used to support international and domestic trade transactions.

Payment

Trade Finance products facilitate payments around the world. Funding ensures the fast transfer of funds while helping to ease cash flow gaps and protect the buyer and supplier from non-performance risks.

Risk Mitigation

The conditions of payment in a Trade Finance transaction help to mitigate the risk involved for both the buyer and supplier.

Financing

Funding can be used to support every stage of the transaction. The supplier can get paid faster, while the buyer can avoid cash flow gaps while waiting for goods to arrive.

Information

Miscommunication is one of the main reasons for disputes between buyers and suppliers. Trade Finance helps to avoid miscommunication by ensuring accurate and timely information so that both parties can conclude a transaction with confidence.

International and domestic trade involves risk for both the supplier and the buyer. The supplier needs to ensure that a potential buyer can pay for the goods, and the buyer needs to ensure that the goods will be manufactured and delivered on time.

Trade financing helps to mitigate the risk for both parties, helping importers and exporters. For example, a letter of credit ensures that the supplier knows they will be paid for the goods produced, and the buyer will only pay for the goods when certain conditions are met, such as the submittal of a bill of lading. Once the terms of the agreement are met, payment is issued to the supplier.

Trade finance and supply chain finance are both financial solutions that facilitate trade and help buyers and suppliers to manage working capital and mitigate risk. But some differences make each solution more suitable for specific circumstances.

Supply chain finance is typically used when the buyer and supplier have a history of trading. The buyer usually has a stronger credit rating than the supplier and agrees to approve the financing of their supplier’s invoices to increase liquidity for both parties.

Trade finance covers a broader range of solutions and offers more risk mitigation for suppliers and buyers that have never done business together before. Letters of credit and documents against payments are two well-established ways trade finance can mitigate risk.

The level of risk involved in a trade transaction is lowered when a third-party finance company provides funding. But even with Trade Finance, the supplier and buyer still encounter a degree of risk.

Buyers

The buyer’s primary risk is that supplier will not deliver the purchased goods under the terms of the contract once the finance company has funded the transaction. To mitigate this risk, the finance company will analyse the supplier’s track record and may require Documents Against Payments before transferring funds.

Suppliers

For the supplier, the degree of risk is based on the buyer’s ability to provide payment upon delivery of goods. A strong credit rating and track record can be important when dealing with a new customer. The finance company will usually issue a Letter of Credit to help mitigate the risk of non-payment from the buyer.

Alongside the primary risks involved, external factors like foreign exchange risk, geopolitics, and sanctions may need to be considered. Our experienced Trade Finance specialists at ScotPac can help you mitigate these risks and ensure a smooth transaction.

Trade Finance is not a loan. A typical Trade Finance arrangement is a short to mid-term funding solution that allows both the buyer and supplier to conclude a transaction without suffering cash flow shortages.

The supplier can use the unpaid invoice to access funding while the buyer can access credit to cover the costs of purchased goods.

We understand it’s vital to move fast to capitalise on opportunities. The terms of your credit arrangement will determine how long it takes to release funds. We’ll work with you to put a funding facility in place in as little as 24 hours of approval.

The cost of trade finance depends on the type and duration of the facility and the services you require. We offer some of the most affordable rates on the market.

Fill out a quick enquiry form or call us today to determine the right solution for your business. If you need help negotiating with international companies and manufacturers, our expert trade advisors in New Zealand and China are happy to help.