Is it a constant challenge to pay your suppliers as you wait for your customers to pay you? No matter whether you’re dealing with other firms at home or overseas, trade finance can help. It can unlock the cash that’s tied up in your customer orders at the start of your sales cycle. In doing so, small business trade finance can ensure you avoid any unhelpful cash flow concerns.  

What is trade finance?

The definition of trade finance can differ in certain situations. For some trade finance providers, it’s a solution that’s specifically for those involved (or starting out) in overseas trade. So, it can be used by importers of foreign goods or exporters with products heading for other markets.

But trade finance can also be a useful funding solution for any business with suppliers to pay. It could be the best way to facilitate the growth of your company, for example. A trade finance provider will step in to pay your supplier(s) sooner – keeping your business dreams on track.

What can I use trade finance for?

Trade finance can relieve some of the pressure you face as a business. It’s not always possible to get the cash you need when you need it. Our Construction Finance product is an example of this. You might sign a large, long-term contract, but the way payment is structured means the funds aren’t there as and when you need them. Here is why trade finance could be right for you:

Take the bite out of late payments

Late payments are a real challenge for UK SMEs. It’s thought that around 50,000 smaller firms will fail each year after not being paid on time. For the many other SMEs that do survive, those late payments can create a serious bottleneck.

But trade finance products can help reduce that reliance on your outstanding invoices.

Cover your supplier/product costs

The number one reason to seek small business trade finance is to cover your initial costs. With orders to fulfil and growth opportunities to take, it can join the two ends of the buying process – forward-funding your purchase orders to pay your suppliers sooner.

Avoid applying for credit or equity

Trade finance can be a solution if you want to avoid debtor equity financing. You may not find it easy to get approval for a bank loan for some reason. Or perhaps the prospect of handing over part of your company for capital doesn’t appeal.

Start trading with overseas companies

A lot of trade finance providers can make it easier for you to import to – or export from – other countries. The provider can take care of payments that involve your suppliers and customers in their local currencies. It means you won’t have to worry about getting the best exchange deals.

How does trade finance work?

In this context, trade finance products can bridge the gap at the start of the buying journey. If your customer commits to buying from you and hasn’t yet paid, you could struggle to fulfil that order. After all, that cash isn’t yet available to you. And you still need to pay your suppliers.

A structured trade finance agreement can solve all that quickly and easily.

The best trade finance providers look at your order and do essential due diligence to check that everything’s in order. If it is, the provider will then deal with your suppliers directly. They’ll place the order with your supplier and make payments on your behalf.

With your suppliers paid, you’re now free to fulfil the order without any unhelpful delays. When your goods arrive with your customer, they’ll pay your trade finance provider to cover the costs involved. You then receive the profits – minus any fees owed to the finance provider.

What are the different trade finance types?

Trade finance products come in various forms. This will depend on the provider you choose – as well as what type of provider they are. Here’s a selection of the types of products out there:

Letters of credit

The provider (e.g. a bank) writes to the seller or exporter on behalf of the buyer or importer. It says that, if the seller sends the necessary documents to the buyer’s finance provider as agreed in the purchase agreement, payment will be made.

Bank guarantees

As the name suggests, this is where a bank – or another provider – guarantees to pay the seller if the buyer fails in their obligations.

Trade credit

Under this type of trade finance agreement, a business can get the products they need from the seller or exporter – without needing to pay there and then. Instead, the buyer will pay suppliers within a set time frame. This is usually 30, 60 or 90 days.

Export finance

Like invoice finance, this is where a trade finance provider will supply the funds locked up in an unpaid invoice. The main difference with export finance (or factoring) here, however, is that it’s intended for businesses that sell overseas – rather than just any business with unpaid invoices.

 

Trade finance providers: Where can I find one?

Like other types of business funding, you have a lot of options when searching for trade finance providers. At the top end of the market, you’re likely to find traditional banks and larger lenders that can support trade finance needs running into the millions of pounds.

But that doesn’t mean smaller firms are excluded. Many lenders support SMEs, providing the funding you need to expand. As with any financial product, it’s about doing your research. That’ll give you the best chance of finding the right trade finance provider for you.

Is trade finance right for my business?

It could be. The best way to know for sure, however, is to think about these two points:

−       Do you need to pay a supplier following a purchase order from your customer?

−       Is your business involved in the import or export of goods/products for resale?

If this applies to you, then yes – trade finance could be right for your business. You can think of it as a solution for firms with trusted buyers and suppliers. If you don’t have the spare capital to fund your orders yourself, a trade finance agreement may be the answer.

But what about if this doesn’t apply to you? Or you’re still not sure that trade finance is the way forward? Talk to the team at Nucleus and see how our alternative finance solutions could help.

Business trade finance FAQs

What are the benefits of trade finance?

If you’re eligible for trade finance, there are a few benefits over other types of business finance that can make it the ideal solution. In the first instance, it unlocks cash you have tied up in unpaid orders. When your cash flow is restricted, paying your suppliers can take time.

And that’s a problem when you have customers to keep happy.

Doing business overseas? Trade finance can be a great way of dealing with payments in various currencies. Your provider can pay your supplier in their currency, receive your payment in your customer’s currency, and send the profits to you in your currency.

One other potential benefit is how trade finance could improve your buyer relationships. It may help you offer customers the chance to pay later on future orders – knowing you’re covered for the value of that order. Or it can help attract new buyers if it enables you to offer flexible terms.

What are the disadvantages of trade finance?

One big downside to trade finance is that it can’t be used for anything else. Want to grow your staff headcount? Need new equipment? A trade finance agreement won’t give you the freedom to do that. You can always use the profits you make – but it might not work in the short term.

It’s also important you stick to the terms of your agreement to avoid any potential disputes.

And the nature of doing business across borders means there are always risks relating to how your products reach their final destination.

Do I need to pay interest on trade finance?

Yes, using trade finance means there is interest to pay. More often than not, rates range from 1.25-3% over a 30-day period. You might also find that larger orders can help push down the rate of interest you’ll pay.

In addition, there are some situations where extra charges are applied to your agreement.

Trade finance vs. invoice finance vs. cash flow finance

It depends on the provider, but you can often find that trade finance and invoice finance come bundled together. But what’s the difference?

Invoice finance is similar in that it unlocks the funds tied up in your unpaid invoices. But it can be seen as more flexible. This is because it’s not exclusively to pay supplier costs. If you have a strong enough order book, invoice finance can be used for nearly anything.

And what about cash flow finance?

Again, there are similarities. But the fundamental difference is that cash flow finance is backed by your expected flow of cash. Unpaid invoices are often just one part of this. As such, it could be great for businesses that have peaks and troughs at different times of the year.

If you’re unsure about which funding solution is right for you, why not drop us a line? Our team of experts will consider the exact needs of your business – and how best to support them.