Trade Finance | 2018 Trade Finance Guide

What is Trade Finance?

Trade Finance Global / Finance Products / Trade Finance | 2018 Trade Finance Guide

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Trade Finance – At the Forefront of Global Trade

Trade finance is the financing of domestic and international trade – if a company trades goods, services or commodities and have a trade cycle, this can be financed using a variety of financial instruments which come under the umbrella term of  ‘trade finance’. In this guide we’ll look at how Letters of Credit, Bank Guarantees, Receivables and Loans can be used in conjunction to finance trade flows.

How can we help you with trade finance?

We work with 270+ banks, financial institutions, trade finance funds and alternative funders from a variety of jurisdictions, product specialities and financing types to collaboratively help you grow your trade lines whether it’s cross-border or domestically.

Our specialists look at a whole range of financing options no matter how complex. From vanilla trade or export finance facilities right through to financing cross-border commodity trade flows, our experienced team are here to help you grow.

We know you’re busy managing the day to day, so we work around the clock and on your behalf to arrange financing as quickly as possible. We’re your partners in trade and work with the most sophisticated lenders on the market.

At Trade Finance Global, we can reach out to the key influencers and stakeholders at many different banks and finance institutions to make sure your application gets through to the right person quickly and you can get funding as quickly as possible.

We’re 100% independent & impartial: working only for our businesses

Trade Finance Global are not tied to any lenders, have the flexibility of working with you to get the right product, no matter how complex. Often the financing solution that is required can be complex, and our job is to help you find the most appropriate trade finance solution for your business.

Get in touch with our trade finance experts, even if you already have an existing facility with another bank

trade.team@tradefinanceglobal.com

Want to become a finance expert? Receive our free trade finance e-learning guide

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The Benefits of Trade Finance at TFG

  • Facilitates the growth of a business – Cash is king. By making your stock and business assets work for you, freeing up working capital can help you get your next client, trading higher volumes, or finance the day to day running of the business. Trade finance is a form of short to medium term working capital solution which uses the security of the stock or goods being exported / imported as a guarantee.
  • Increased revenue potential / Higher margins – Trade finance allows buyers to request higher volumes of stock from suppliers, meaning your business can take advantage of economies of scale, bulk volume discounts. Trade finance can also help strengthen the relationship between buyers and sellers, increasing profit margins and EBITDA.
  • More efficiency in trades and supply chain – Trade finance helps finance the entire supply chain, right from the supply all the way to being paid by the end customer
  • Mitigates risk from suppliers – Trade financing reduces credit and payment risks or bad debt risk on suppliers as the funders take hold over the goods being traded. Trade financing focuses more on the trade than the underlying borrower (not balance sheet led), so small businesses with small balance sheets can trade larger volumes more easily and work with larger end customers
  • Diversify your supplier network – Working with other international players allows business owners to diversify their supplier network which increases competition and drives efficiency in markets and supply chains
  • Reduces bankruptcy risks – Late payments from debtors, bad debts, excess stock and demanding creditors can have detrimental effects on a business. External financing or revolving credit facilities can ease this pressure and prevent an SME from facing these risks

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Trade Finance – Knowledge Hub



Hub Articles

Why 2018 will be a great year for trade finance

A summary of key trends in 2017 and a forward looking view of the international trade and commodities market. We took a look at the movers and shakers for 2018 with respect to the digitisation of trade finance, step changes in AML KYC and counter-insurgency.

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10 Trade Finance Questions and our Answers

Given that the TFG trade finance team speaks to funders, banks, people looking to trade and open Letters of Credit, we’ve put together a list of 10 questions that are commonly asked or raised during the process of trading goods and/ or services overseas.

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Structured Trade Finance

Structured trade finance products are used primarily in the commodity sector by traders, producers and processors. Banking corporations tailor these financing arrangements based on the needs of the client. Structured trade products are mainly warehouse financing, working capital financing and pre-export financing. Also, some institutions extend reserve based lending and finance the conversion of raw materials into products amongst other bespoke finance products. Structured trade finance products are extended across the supply chain to facilitate trading activities.

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How is trade finance governed and what is the UCP 600?

The UCP 600 (“Uniform Customs & Practice for Documentary Credits”) is the official publication which is issued by the ICC (International Chamber of Commerce). It is a body of rules on the issuance and use of a letter of credit and applies to 175 countries. The aim has been to standardise a set of rules aimed to benefit all parties during a trade finance transaction – for that reason, it is designed by industry experts rather than through legislation. The UCP was created in 1933 and has been revised by the ICC up to the point of the UCP600. The UCP600 came into force on 1 July 2007.

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What is the difference between trade and export finance?

Trade and export finance are sometimes used interchangeably. However, it is important to explain the distinction and how the terms are used.

Trade finance is a term universally used for financing both imports and exports. In many mediums this will encapsulate invoice finance, purchase order finance, off balance sheet lending, letters of credit and similar funding instruments. Trade finance is usually spoken about in reference to cross border trade. However, it may also be domestic trade. It is commented on by many as being seen as a financing mechanism which is not well known in the market, but by having purchase orders and suppliers – there is a way of financing a trade through the use of a lender’s funds.

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Our Case Studies

Base Oil Trader

Trade Finance Global helped structure a receivables finance line and use purchase order finance to help a base oil trader increase their trade lines and work in other jurisdictions.

View Case Study

Clothing Company

Rather than waiting 90 days to get paid to put in the next order, we helped a clothing company grow faster by structuring their trade finance so that they could work with more suppliers and receive bulk discounts.
View Case Study

Shoe Company

A shoe production company needed to open an escrow account for their South American suppliers by using a deposit and trade facility which TFG helped structure, coupled with a receivables finance line.
View Case Study

Machinery Trader

TFG helped structure a stock finance facility and a confidential invoice finance line so that they didn’t have to use their existing balance sheet cash to fund orders from their suppliers, as well as deal with long payment terms.
View Case Study

Frequently Asked Questions

Why is trade financing important?

International trade accounts for around 3% of GDP, employing millions of people around the world. Some 90% of global trade is reliant on supply chain and trade finance, totalling USD $10 tn a year. Trade finance is a form of cash flow lending which helps finance trade flows, global supply chains and procurement of goods both domestically and internationally.

What does trade finance include?

Trade finance includes the following:

What are the methods of payment for trade finance

Cash Advances

As the least risky product for the seller, a cash advance requires payment to the exporter or seller before the goods or services have been shipped. Cash advances are very common with lower value orders, and helps provide exporters / sellers with up front cash to ship the goods, and no risk of late or no payment.

Letters of Credit (LCs)

Letters of credit (LCs), also known as documentary credits are financial, legally binding instruments, issued by banks or specialist trade finance institutions, which pay the exporter on behalf of the buyer, if the terms specified in the LC are fulfilled.

An LC requires an importer and an exporter, with an issuing bank and a confirming (or advising) bank respectively. The financiers and their creditworthiness are crucial for this type of trade finance: it is called credit enhancement – the issuing and confirming bank replace the guarantee of payment from the importer and exporter. In this section, and in most cases, we may consider the importer as the buyer and the exporter as the seller.

See a worked example here of how trade finance can be used to finance the purchasing of Frozen Fish from a supplier, to be sold on to end customers:

Documentary collection

Documentary collections differ from a Letter of Credit (read our blog post on the differences between DCs and LCs).

In the case of DC, the exporter will request payment by presenting its shipping and collection documents to their remitting bank. The remitting bank then forwards these documents on to the bank of the importer. The importers bank will then pay the exporters bank, which will credit those funds to the exporter.

Open Accounts

An open account is a transaction where the importer pays the exporter 30 – 90 days after the goods have arrived from the exporter. This is obviously advantageous to the importer and carries substantial risk for the exporter – it often occurs if the relationship and trust between the two parties is strong.

Open accounts help increase competitiveness in export markets, and buyers often push for exporters and sellers to trade on open account terms. As a result, exporters may seek export finance to fund working capital whilst waiting for the payment.

Who are the providers of trade and export finance?

Retail and commercial banks

Some commercial banks have specialised trade finance divisions, which offer facilities to businesses. Commercial banks represent the majority share of financial institutions globally, although they range in size from small and niche banks to large multinational banks.

The banking services offered by trade finance commercial banks include: issuing letters of credit, accepting drafts and negotiating notes, bills of exchange and documentary collections. The advantage of larger commercial banks over smaller niche banks is twofold: their global presence (they may have foreign subsidiaries which makes L/C confirmation cost effective), and their credibility.

Alternative Finance and Non-Bank Funders

There are many types of financial institutions that do not use public deposits as a funding resource. Funding sources include crowd-funded (pooled) investment, private investment and public market sourced capital.

Traditional ‘receivables-backed finance’ has been disrupted by smaller finance platforms since the economic crisis. This has been driven by a decrease in appetite for risk by larger banks, which has opened the doors to agile smaller finance lenders, who can fill the gap. Private investment funds and larger banks provide capital to alternative trade financiers. Crowd-lending (peer to peer) finance has also entered the trade finance sector. In addition to this, new technologies to disrupt the somewhat lengthy application process for certain types of trade finance make it easier to assess risk, supply credit and documentation to importers and exporters.

What is the process for applying for trade finance?

1. Application

The initial ‘credit’ application drives the process when applying for credit. A trade finance application will require provision of the following:

  • Thorough introduction to the business, including a future vision (business plan), goals of the business and any significant accomplishments to date
  • Information on the key stakeholders/ directors including past experience and equity make up of the company
  • Introduction and an analysis of the product or service offered
  • Overview of the sector/ competitor landscape
  • Summary of anticipated results, including financial forecasts

Lenders will often ask for information on current assets or collateral that the business owns, including debt and overdrafts, assets that the company or directors own (property, equipment, invoices).

2. Evaluating the Application

The lender will undertake a full credit risk assessment of the documents that have been received. The credit analysis will usually involve inputting figures from the applicant’s income statement, balance sheet and cash flow documents. It will also take into consideration the collateral the SME can provide, and the quality of this.

The evaluation process will normally involve some kind of credit scoring process, taking into account any vulnerabilities such as the market the business is entering, probability of default and even the integrity and quality of management.

3. Negotiation

Eligible SMEs applying for trade finance can negotiate terms with lenders. An SME’s aim with a lender is to secure finance on the most favourable terms and price. Some of the terms that can be negotiated can include fees and fixed charges, as well as interest rates.

If you’re prepared and understand the structure of fees and charges, it can help you negotiate terms that are in your favour. Sometimes it may be a good idea to seek advice from your local trade body to avoid any risks, understand the charges and the structure of the loan and insurance.

4. The Approval Process and Documentation of a Loan

Typically, the account officer who initially deals with the applicant and collects all of the documentation will do an initial credit and risk analysis. This then goes to a specific committee or the next level of credit authority for approval. If the loan is agreed (on a preliminary basis) it goes to the legal team to ensure that collateral can be secured/ protected and to mitigate any risks in the case of default.

The loan document is a legally signed contract from both parties that consists of definitions, a full description of the finance facility that has been agreed (amount, duration, interest rates, currency and payment terms – both interest and non-interest charges). The conditions of a loan will also be included, which will state any obligations of the buyer and the lender, as well as what would happen in the case of any disputes or a default.

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