Trade Finance

Trade finance is a form of working capital and usually refers to financing facilities to ensure cross-border transactions, such as imports and exports.

For an importer, it can mean receiving funding to pay an overseas supplier. This accounts for the gap between the time the goods are paid for and the time they are received, sold and transformed into capital. For an exporter, it can mean receiving payment for goods or services that have been provided but yet to be delivered.

Exporters are usually also interested in export factoring or bill facilities as the main means of financing overseas credit. This can be supported by a provided letter of credit to secure the transaction and reassure both parties.

For importers, purchasing goods or services from a supplier with no payment terms or a short term can create a working capital or cash flow gap. Trade finance fills in this gap so that the company is not out of pocket or unable to access required cash.

• Trade finance is more flexible than business loans or overdraft facilities.
• It allows businesses to retain access to capital while their goods or raw materials are being shipped from overseas.
• It allows trading partners to negotiate bulk buying or early payment discounts from their suppliers.
• It ensures the smooth running of an international transaction, especially with support from overseas trade advisors such as the ScotPac team in Guangzhou, China.
• Ensures fast access to reliable funding. This allows a business to fill large orders, access bulk discounts, take advantage of seasonal cycles and ensure stock levels are adequate. 

For exporters, a trade finance facility can help to smooth over the gap between the manufacturing and supplying of goods and the time at which payment is received.

• More capital can be freed up during manufacturing.
• Suppliers are paid quicker and more reliably.
• Upfront payments can secure a discount.
• Faster application processes without the strict red tape of traditional loans ensure a smoother, faster process.
• Flexible lines of credit can grow in sync with your business. 

In short, trade finance helps businesses on both ends of the transaction to build trustworthy relationships for international trade. Exporters and importers can enjoy healthy cash flow, working capital access and the support they need to accelerate growth and ensure success.

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

Letters of Credit

A letter of credit helps to reduce the risk for both the supplier and the buyer by guaranteeing payment. There may be certain conditions to be met, such as when goods are shipped, or the buyer receives the goods, but the letter reassures both parties that the payment will be provided. For the buyer, it provides reassurance that the goods paid for will be manufactured and shipped on time before payment is released to the supplier.

Documents Against Payments

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

Telegraphic Transfer

A telegraphic transfer – or TT – is one of the most widely-used payment methods when it comes to trade finance. In short, it is a form of electronic transfer of funds to the recipient’s bank account. Due to the fact that many suppliers will require an advance payment before they manufacture goods, the TT can be used to ensure funds are provided quickly and on time.

Invoice Finance

Invoice finance allows businesses to use their accounts receivable, or outstanding invoices due to them, as collateral to boost cash flow. With up to 95% of the value of outstanding invoices available upfront and fast, it can be a simple way for businesses to improve short term access to working capital. The remaining balance is often released once customers pay the invoice. Combined with other forms of trade finance, invoice finance can allow businesses to access otherwise tied up capital due to the delays in shipments and manufacturing processes.

There are four main parts of trade finance that work together to support international and domestic trade transactions.

Payment

Trade Finance products facilitate payments internationally. The fast transfer of funds can help to ease cash flow gaps and protect both the buyer and supplier from non-performance risks.

Risk Mitigation

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

Financing

Funding can be used to support every stage of the transaction. Suppliers can receive payment faster, buyers can avoid cash flow gaps, and more trust can be built in the relationship.

Information

Miscommunication is often one of the main causes of disputes between buyers and suppliers. Trade Finance ensures miscommunication is minimised by providing accurate and timely information that both parties can rely on with confidence.

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

Trade financing helps to mitigate this risk for both sides of the transaction, 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 the certain conditions are met. Once this all occurs, payment is issued to the supplier.

Trade finance and supply chain finance are both financial solutions that facilitate trade and help buyers and suppliers. They both allow businesses to manage access to working capital and to mitigate risk. But there are some differences that make each solution more or less suitable for different businesses, depending on the circumstances. 

Supply chain finance is typically utilised when the buyer and supplier have a prior history of trading. In this case, the buyer usually has a stronger credit rating than the supplier and then agrees to approve the financing of their supplier’s invoices to increase liquidity for both businesses.

Trade finance covers a broader range of trade finance products and offers more risk mitigation for suppliers and buyers. This is especially necessary in instances where there is no prior history of business. For example, letters of credit and documents against payments are two tried and tested ways trade finance can mitigate risk and increase the level of confidence for both parties.

Third-party finance companies providing funding can significantly lower the risk of trade financing. But even with Trade Finance, there is still a degree of risk inherent in international trade.

For Buyers

The buyer’s primary risk is that the supplier will not deliver the purchased goods on time or to specification under the terms of the contract, especially once payment has been received. 

To reduce this risk, the finance company will analyse the supplier’s track record and may require Documents Against Payments before transferring funds or providing payment.

For Suppliers

For the supplier, the degree of risk is based on whether the buyer is able to provide payment for the goods ordered. A strong credit rating and financial track record can be important in such instances. The finance facility providing company will usually issue a Letter of Credit to help mitigate the risk of non-payment from the buyer.

Other Risks

Alongside the primary risks involved, external factors like foreign exchange risk, geopolitics, and international sanctions can also affect international trade. 

If you’d like to find out how to mitigate the risks of international trade and ensure smooth transactions, make sure to speak to our experienced Trade Finance specialists at ScotPac today.

No, it is not a loan. Trade finance in Australia is an arrangement with a third party to produce a short or mid-term funding solution to allow a transaction to take place without either business suffering from cash flow gaps or shortages.

Suppliers can use the unpaid invoices to access funding while buyers can access credit to cover the upfront cost of purchased goods.

ScotPac knows just how important being agile, flexible and quick is to capitalise on trade opportunities. With funding facilities requiring as little as 24 hours for approval, we can ensure that you’re able to access funds as quickly as possible, pending the terms of your credit arrangement.

Trade finance products will incur costs depending on the type and duration of the term of the facility. ScotPac’s market-leading affordable rates will ensure you get best value for money. Speak to our specialists today for more tailored fee information for you.

There are two ways in which you can set up a trade finance facility with ScotPac. Either fill out our quick enquiry form, or call us today. 

We’ll work with you to find the right solution for your business. If you need help negotiating with international companies, suppliers and manufacturers, we even have expert trade advisors in both Australia and China who would be more than happy to assist you.