Trade finance and supply chain finance are very similar to invoice financing. They’re types of working capital financing that are designed for businesses that focus on the physical stock rather than service businesses.
Trade Finance Or Purchase Order Finance is designed to help businesses close the gap payment at the beginning of their sales cycle, allowing your company to fulfil orders without being out of pocket for weeks or months. Trade Finance is essentially a loan that allows you to pay your suppliers upfront for stock or inventory – allowing the goods to be shipped sooner and sold to your customers.
Trade Finance exists primarily for wholesalers or manufacturers who get their goods or parts of their goods, manufactured overseas. Lenders will fund purchase orders, which is where it gets its other names Purchase Order Finance or Import Finance – as it generally revolves around companies who are importing their goods.
Dave’s Ladders manufactures ladders in China. Screwfix has put a massive order in for 20 pallets of ladders, however, Dave hasn’t got enough cash to pay his suppliers to make the ladders. Dave takes the purchase order to a Trade Finance company who decides that they will lend Dave the money. The Trade Finance company orders the ladders on behalf of Dave and pays the invoice once the ladders are made. This allows the supplier to send the ladders faster than normal as the payment has been made in full.
Dave then sends the ladders to Screwfix and Screwfix will pay his invoice to the Trade Finance Company. The Trade Finance Company will then pay Dave his profits minus their fees.
- Trade Finance is not always limited to overseas relationships and can sometimes be done domestically as well.
- It can be used not just in manufacturing, but even with suppliers of products.
- As Trade Finance can be essentially a liaison investor, it allows a business to grow and scale much faster without needing large cash reserves.
- Trade Finance is often just one key in a set, to unlock finance. It works really nicely with Invoice Financing and Asset Financing as well.
- As long as your customers and suppliers are reputable companies, Trade Finance can give small businesses the keys to grow when they have made their first big sales. It is easier than trying to find private investment and is ultimately cheaper than selling equity.
Trade Finance & Invoice Finance working together
Two keys that quite often go together, but don’t have to is Invoice Finance and Trade Finance. With an example like Dave’s ladders above, it will still take Dave probably 90 days to get paid by Screwfix for his ladders.
If he was to use Invoice Financing as well, he could then pay off the Trade Finance sooner saving him interest and fees. Quite often companies that offer Trade Finance will also offer Invoice Financing, however, you don’t need to use the same company to offer both. Separate companies may be cheaper, and it is worth exploring your options with our brokers and partners
Meanwhile, you don’t need both Trade Finance and Invoice Finance together, it is just very common as these industries tend to operate with both long payment terms from customers and upfront payment demands from suppliers.
Who offers Trade Finance?
There are a number of Trade Finance lenders on the market, however, they tend to lend to very set size businesses and turnovers. High St banks such as Barclays and HSBC offer trade finance, however, they really target companies that fund purchase orders £3m+, which is a bit high for small SMEs.
Other lenders like Bibby, for example, will fund smaller purchase orders, however, they will only lend to companies who also have Invoice Financing with them as well.
But don’t let this worry you. There are also lenders such as Ultimate Finance, Woodsford Tradesbridge or even Aldermore Finance who will give you the option to either just take out Trade Finance, Invoice Finance or both. While there are some specialist funders in the market who are industry-specific, it doesn’t mean they are the best value for money. We warn companies to make sure they are aware of all fees and charges when entering agreements with any lenders.
The best way to work out the best solution for your company is to ask for a quote and get in touch with one of our Brokers and Partners today. We will help you craft a deal that is perfect for you and your situation.
What are the lending criteria’s for Trade Finance?
There are three main questions that need to be asked, to see whether Trade Finance is right for you. These questions are:
- ‘Have you made a sale, but haven’t got enough cash to buy the products?’
- ‘Have you got a purchase order from your supplier’
- ‘Do you need to import or export products for resale?’
If you have answered yes to these three questions then you are eligible for Trade Finance. One of the best things about Trade Finance for small companies is that unlike other lendings it isn’t based strictly on your cash flow or balance sheet.
Lenders are more interested in who your customers are and who your supplier is. The lending is more around the supply chain and the group of businesses, rather then just your business and its bank account. Trade Finance unlocks the working capital you need to grow your business and take on the larger clients that you want to sell to.
Costs of Trade Finance
The cost of Trade Finance is variable based on a number of factors. Firstly, interest rates can vary based on who you are working with. Remember interest rates are a depiction of risk. If your supplier is high risk or the lender believes they might not supply the goods, then the interest rate will be higher. Same with your buyer, if the lender believes that they may not buy the finished product, then the interest rate will also be higher.
The best way to find out interest rates is to get in touch and our brokers and partners will give you the best rates they can access in the market. As a general rule interest can range from 1.25% to 3% over a 30-day period. The bigger the purchase order, the lower the interest.
Fees are something else you must take into consideration. Credit protection means that the lender will be liable for the loss if your customer doesn’t pay. This increase the risk, so will increase the cost. However, a positive way of looking at this, is that Trade Finance gives you extra protection as a business when using overseas suppliers and/or buyers.