For many business owners, a business loan is just a business loan. However, there are dozens of different financing options that are tailored to different types of companies, operating styles and types of businesses. Like anything in business, research and preparation is key. Taking the time to fully understand the types of finance that are available to you can be really beneficial to your business in the long term – even if it means allocating time in the short-term to get it right. For example, low doc or no doc loans are usually the best fit for those who are self-employed and unable to provide banks with the detailed documentation needed for traditional business loans.
For international businesses buying and selling goods from around the global market place, trade finance is usually the best option for financing. A Trade Finance Loan is best for businesses that import goods from suppliers abroad. It works particularly well for businesses that have a successful trading record, have two or more years of credit, a good credit score, and positive cash flow.
Trade Finance is a loan that delivers payment to an exporter on behalf of the importer before goods have arrived. The lender will loan money to the importer so the exporter can be paid once goods have been shipped.
Collateral for these loans is usually the goods in transit. Trade finance instruments come in the form of letters of credit, export factoring, export credits, insurance or lending facilities. Most trade finance loans are short-term as they facilitate the purchase of goods and are then paid off once those good are resold on the marketplace.
Because trade finance is short-term, most companies will need to take out a separate trade loan for a specific transaction. For example, if you run a company that imports bananas into Australia, the trade loan you apply for will be for one shipment of bananas.
Once you receive the bananas, inventory them and sell them off to other retailers, you pay back the loan and will need to re-apply for another loan when you´re ready for another shipment of bananas.
On a global scale, it’s estimated that between 80 and 90% of global trade is dependent on some sort of trade finance loan option. The market for trade finance is estimated to be around 10 trillion dollars a year, making it an important player in the global economy.
Sticking with our banana importer example, it wouldn’t make financial sense for a company to import one container of bananas at $10,000 dollars per container when the cost per container at 100 containers drops down to $4,000 per container.
Because of the costs associated with shipping, and the legal documentation associated with international trade, most shipping companies prefer to operate with large volumes and will subsequently offer much lower rates to companies willing to purchase in bulk.
The problem, of course, is that while your company might have been able to pay out of pocket for one container of bananas, paying for 100 containers, even when they´re at half the price this is a significant expense. Very few companies will have the financial liquidity to be able to make that sort of upfront payment.
Trade finance or a trade loan can help companies continue with their business practices when capital costs are high. Additionally, because profitability goes up with larger volumes, these loans can also help increase the profit margin of import, export and domestic trade companies.
As with many business practices, companies that work in import, export and domestic trade live in a high-risk, high-reward world. Because of the large movements of capital, late payments can effectively cripple a company.
For example, returning to our hypothetical banana company, let´s imagine this company wanted to try to avoid taking on any sort of trade finance loan. With an available cash flow of $100,000 dollars, they invested $75,000 in several containers of imported bananas, then sold those bananas to retailers around the country.
Several of their clients asked for credit to be able to purchase the bananas. Because of the lack of available cash, if one or several of their clients were to default on their payment, the company would be left without the resources needed to reinvest in the next shipment of bananas.
This would cause them to have to lower the volume and therefore pay a premium price for lower-volume shipments and decrease their profitability. A short-term finance loan would help to decrease such vulnerability and give the company more flexibility to operate their import business.
Trade finance loans help small and medium sized businesses. While a multi-trillion dollar transnational corporation might be able to make huge volume purchases without the need for finance, smaller and medium-sized companies absolutely depend on such loans to be able to purchase in bulk and be able to compete with the “big boys.”
For more than 25 years, Scottish Pacific has been helping business owners to achieve their aspirations and improve their cash flow with innovative funding solutions.
With innovative thinking, Shift performed extensive research in the Australian Business lending market and as a result, it has established Marketlend.
Prospa is the smart alternative for financing working capital for your business.
Capify delivers financial services to small to medium sized businesses for over 13 years.
Moneytech offers end to end financial solutions catering to every link in the supply chain including Trade Finance and Debtor Finance.
If you still have questions as to the benefits and process involved in trade finance, check out the answers to some of the more commonly asked questions on the topic below.
Trade financing is also known as the supply chain, and export finance drives economic development and helps maintain credit flow in supply chains.
Structured trade products typically involve warehouse financing, working capital financing, and pre-export financing. These products are extended throughout the supply chain to facilitate trading activities. Structured trade finance is more complicated than conventional lending but is a suitable alternative. It is a type of debt finance used often in relation to cross border transactions and developing countries.
Trade financing is different than conventional loans because the advanced funds are based on current transactions and customer credit rather than your own business credit. The funds for this transaction are received against an invoice and purchase order so that the financing reviewed can continue to grow.
The types of trade finance are trade credit, cash advances, receivables discounting, term loans, leasing and asset-backed finance, among others.
Through trade finance operations, you are introducing a third party to transactions to remove the payment and supply risk involved. It helps to settle any conflicting needs that may exist between an exporter and an importer while providing the exporter with accelerated receivables. The importer, in turn, receives extended credit.
Reducing the risk of international trade for exporters is a way that the banks make money from trade finance.
Retail and commercial banks are the providers of trade and export finance. The banking services include issuing letters of credit. They also accept drafts and negotiate notes and bills of exchange.
You will first need to fill out the application. A trade finance application often requires extensive information, including a business plan that details the goals of the business and any significant accomplishments. It also includes information on key stakeholders, an introduction of the product or service that is being offered, an overview of the sector, and a summary of any and all anticipated results.
The application for trade finance is then evaluated and undergoes a credit risk assessment. The financial institution or lender may request information on all current assets owned by the business, including any current debts and overdrafts, and assets.
Once deemed eligible, you can then begin to negotiate the terms of the agreement. During this step, you want to look for ways to avoid risk. So, make sure to have a good understanding of the charges as well as the overall structure of the loan and the insurance being offered.
We then come to the approval process and the documentation step. The credit and risk analysis will be done to determine the credit authority for approval. The documents are then signed once all terms are agreed on including the amount, the duration, interest rate, currency, and other payment terms.
Trade finance and supply chain finance are both designed to finance international and domestic supply chains. However, with trade finance, you are offered more solutions. It requires both the seller of the goods as well as the buyer. Banks and other financial institutions are available to facilitate these transactions and finance the trade.