If your supplier wants a deposit before production even starts, and then the balance before shipment, your cash can be locked up for months before you have made a single sale.
Trade Finance can fund both of those payment points, so your own working capital stays available for wages, freight and the everyday running of the business. Paired with an Invoice Finance facility, funding can run from the moment you place the purchase order through to the point your customers pay you.
Why does a supplier deposit create a cash flow problem?
Deposits tie up working capital before any revenue has been earned. For most importers there are 3 separate outlays:
- The deposit, due before your supplier begins production and well before you see the goods
- The balance payment, often required once goods are manufactured but before they ship
- Freight and clearance costs, to get the goods into your warehouse and onto your shelves
Each of these payment gates sits well ahead of the point where cash comes back into the business. For a small or medium sized importer, paying in advance for stock is a recurring pressure point, and it gets harder as the orders get bigger.
What a 30% deposit looks like in practice
Take a $200,000 order from an overseas supplier on fairly standard terms:
- 30% deposit on order confirmation: $60,000
- 70% balance before shipment: $140,000
- Freight, duty and clearance on arrival: variable, but payable before the stock is sold
That is $60,000 leaving the business before production starts and the full $200,000 committed before a single unit reaches a customer. If your customers then pay on 60-day terms, and the goods spend 4 to 6 weeks in transit and clearance, the business can be out of pocket for 3 to 4 months on one order.
Trade Finance funds those payment points instead, so the money stays in the business while the goods are made, shipped and sold.
What is Trade Finance and how does it fund supplier payments?
Trade Finance provides funding to purchase goods or raw materials from overseas or domestic suppliers. It can cover your deposit and your balance payment, so production can begin and your order can ship without draining your own cash reserves.
How Trade Finance covers each stage of the payment cycle
A facility can be structured to follow your actual payment cycle, with repayment periods aligned to your sales cycle rather than a fixed monthly schedule. Understanding each payment point shows you where the cash gets stuck, and where funding can do the work instead.
1. Purchase order confirmed
You agree terms with your supplier, including the deposit amount and when the balance falls due.
2. The deposit falls due
Your supplier needs a deposit before they’ll start manufacturing. But since you don’t have the cash inflow from selling those products yet, your money gets tied up in goods that haven’t even been made. Trade Finance can cover this upfront payment for you.
3. The balance payment falls due
Once the goods are manufactured but before they ship, the balance is usually due. This is the largest single payment in the cycle. ScotPac can fund up to 100% of the cost of goods, so your supplier is paid and the order ships.
4. Goods are produced and shipped
Funding is available for up to 150 days, with repayment terms built around your trading cycle. Your working capital stays free across the weeks between paying your supplier and taking delivery.
5. Goods arrive and are sold
You receive the stock and sell it on to your customers. Revenue starts flowing back into the business and the facility is repaid as the trade cycle completes.
The point of the structure is that you do not have to choose between ordering the stock you need and holding enough cash for payroll and overheads. It can also let you take on larger orders than your reserves alone would allow.
Why fund with Trade Finance rather than your own cash?
For importers, the main advantages are:
- Your working capital stays available for payroll, overheads and other operating costs
- Funding of up to 100% of the cost of goods, so order size is not limited by cash on hand
- Repayment periods aligned to your sales cycle rather than a fixed calendar
- Supplier payments in AUD, USD and other currencies
- The ability to negotiate bulk or early payment discounts, because you can pay upfront
- Paired with Invoice Finance, funding across both sides of the trade cycle
How does Trade Finance work alongside Invoice Finance?
ScotPac’s Trade Finance facility typically works alongside an Invoice Finance facility.
Trade Finance covers the buying side, from placing the order through to the stock arriving. Invoice Finance covers the receivables side, because once the goods are sold you may still wait 30, 60 or 90 days for your customer to pay.
With up to 85% of the value of eligible outstanding invoices available upfront, you are not waiting out customer payment terms before accessing the cash owed to you. The balance is released once your customer settles, less applicable fees.
Together, the 2 facilities can close the gap on both sides of the cycle, from supplier deposit through to customer payment.
Let’s have a chat. Speak to a ScotPac lending specialist to talk through your supplier terms and trade cycle.
