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The term ‘trade finance’ covers a range of financial products and instruments that help importing and exporting businesses to function more effectively. These products include letters of credit, supply chain finance, and forfaiting, and they provide tailored support to cash flow.
Trade finance helps importers and exporters to improve the speed and certainty of financial transactions with their trading partners, and reduces the inherent risks of global trading, such as creditworthiness, currency stability, and non-payment.
A financial ‘third party’ or intermediary, which could be a bank or an alternative finance provider, can smooth international trading transactions by funding the purchase of goods from a supplier on the buying company’s behalf.
When the buyer sells the goods to their customers they repay the intermediary. Trade finance works to improve reliability of payment and delivery between importers and exporters, increasing trust and lowering risk for both parties.
UK Business Finance can provide professional guidance on the best trade finance solution for your business, and ensure that you find the most suitable product.
These are just a few trade finance products that may be available to importers and exporters:
Letter of Credit (LoC)
This is a legally binding letter whereby the importer instructs its bank to pledge to the exporter that it will make payment as soon as the transaction is complete.
Bank Guarantee
A bank can offer a guarantee that provides security for a purchaser if their supplier fails to fulfil its contractual obligations.
Forfaiting
This involves the exporter selling their receivables at a discount to a forfaiting company, which then provides immediate payment. This eases cash flow for the exporter, who might otherwise have to wait a considerable time to be paid.
Builds solid relationships between buyers and sellers
The existence of a financial ‘intermediary’ between buyers and sellers promotes trust and good trading relationships that might otherwise be damaged by uncertainty around fulfilment and payment.
Supports business growth
Businesses are more likely to be able to negotiate favourable terms and make larger orders with their suppliers, so promoting the growth of both parties.
Offers flexibility
With a range of trade finance products available businesses can tailor their funding towards individual needs and benefit from flexible solutions that work specifically for them.
Eases cash flow
The payment gap for suppliers can create uncertainty and jeopardise business stability. Trade finance lowers the risks of trading globally – for example, exchange rate fluctuations and payment delays.
Trade finance can be utilised through a bank or an alternative financier and you will need to compare quotes and deals prior to making an application. Each lender will have their own set of criteria and our expert team will help you find the most suitable trade finance solution.
We are commercial finance brokers and know the criteria of all the lenders in the UK – our no-obligation services are delivered free-of-charge.
We work across a wide range of sectors throughout the UK, providing specialist advice to each sector.
Why use a commercial finance broker?
A commercial finance broker plays an important role for businesses looking for funding. They can source the most suitable types of finance using a whole-of-market search strategy whilst also accessing the best deals and lenders.
What are cash flow forecasts and why are these important when obtaining business funding?
Operating with positive cash flow helps your business to pay its bills, conduct day-to-day trade with minimal issues, and plan confidently for the months and years ahead. But how do you know that there will be sufficient cash available when it’s needed?
Good debt vs Bad debt
Managed well, debt can improve your credit rating, enable expansion, and stabilise cash flow. It’s the backbone of growth but with so many different types of borrowing now available, it’s important for your business to carry ‘good debt’ rather than ‘bad debt.’
How to best prepare my company for a finance application
When preparing your company for a finance application, it’s key to present the business in its best light whilst also providing realistic projections, your plans for the funding, and how it will help the business grow.