If you’re a wholesaler, distributor, or importer, trade finance could give you the cash you need to pay your suppliers. There are various trade finance solutions, but what they have in common is they help you close the payment gap at the beginning of your sales cycle — so you can fulfill customer orders without being out of pocket for weeks at a time.
Trade finance is a form of working capital finance, in the same family as invoice finance and supply chain finance. It is designed to give you the cash you need to buy inventory or stock from a supplier.
Trade finance generally works on a confirmed order basis. If you’ve got a purchase order from a customer, trade finance enables you to buy the stock or inventory you need to fulfill that order. It usually means the goods can be shipped as soon as possible, and you won’t be left out of pocket while waiting for your customer to pay.
Because it’s based on purchase orders, trade finance is sometimes called purchase order finance or import finance. You may have domestic customers, or some in the UK and some abroad — if you’re importing or exporting, trade finance could help.
Some lenders use trade finance as an umbrella term for various products designed for businesses that trade internationally, such as invoice factoring, supply chain finance, import finance and export finance. When we talk about trade finance at Funding Options, we mean the specific type of funding for paying suppliers.
Trade finance is sometimes confused with supply chain finance. This is an easy mistake to make, because trade finance helps you fund the beginning of your supply chain — however, supply chain finance is actually a different type of business lending that buyers offer to their suppliers, and doesn’t apply here.
In the above example, trade finance would be equally suitable if Joe’s manufacturer were based overseas and his customer were based in the UK.
In both cases, the trade financier acts as liaison between the supplier/manufacturer and retailer/end buyer, which means Joe can grow his business without needing a big reserve of working capital — whether he wants to import, export, or both.
Trade finance can also sit alongside any existing finance your business has, like invoice factoring or asset finance.
There are two key questions to ask to find out if trade finance is right for your business:
Have you got a purchase order you need to fund?
Do you want to import or export products for resale?
If the answer to these questions is yes, trade finance could help you grow your business. And trade financiers aren’t as concerned about what’s on your balance sheet as mainstream lenders — what they really want to know is: “what’s the transaction, how much will it grow your business, and who else is involved?”
Trade finance is generally for companies that have good supply chains and end-buyers, but don’t have the working capital to go it alone.
