How do I secure trade finance – what’s the process?

It is important to consider that every lender has specific requirements and criteria when advancing funds. Some banks are very conservative in terms of risk appetite, others less so, and this also determines interest and repayment rates. There are often several requirements and a lengthy process when applying for a loan, and we’ve outlined the main stages of a credit process when applying for a facility.

How to apply for a loan

1. Application

The initial ‘credit’ application drives the process when applying for credit. When a business goes to a bank or financial institution to apply for trade finance, they will require the provision of truthful information about why a business are seeking a specific type of loan, about individuals, and the company.

Generally a business plan with financial forecasts is essential to show to a banker that your business idea is sound and realistic, you can implement it successfully, and that you know what the finance will be used for. Business plans vary in formats, but usually include the following:

  • Thorough introduction to the business, including a future vision and the 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

Often lenders will ask for additional information that can help give an overview of the company or directors. This includes curriculum vitae/ resumes of the directors, articles of association and memorandum, the last 3-5 years of profit and loss accounts, references from banks, budgets and yearly forecasts, current invoices from suppliers or clients.

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. A credit score is normally ranked from AAA (very low risk of default) to D (likely to result in the denial of a loan application).

What does a lender look at to determine an applicant’s credit?

  • Key financial information
  • Management / directors’ credentials
  • Operating market / sector
  • Risk of the transaction
  • Analysis of the collateral

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 non-interest costs, 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. Signatures will also be required from a senior director at the bank for the loan documents.

The loan document is a legal 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.

Repaying the loans once approved

In order to maintain a good relationship with the lender, repayment of an approved loan in a timely manner is essential (it also ensures the business has a good credit rating). Reputation as a borrower is crucial when growing a business – finance facilities and trade funding may not be a one time occurrence, and it can become easier and faster to get funding again once a company establish a good reputation and connection with their lender.

It is also important to remember the contractual and legal obligations that a company has, as per the loan agreement.

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