Trade finance accounts for 3% of global trade, worth some $3tn annually. Simply put, it’s the financing of trade in a company life cycle, whether you’re sending goods, services or commodities, a variety of financial instruments are used to structure this, under the umbrella term ‘trade finance’. Trade finance includes Letters of Credit (LCs), export finance and credit agencies, receivables and invoice finance, as well as bank guarantees. There’s often a lot of confusion in definitions, so we’ve put together a guide on how companies can use these instruments in conjunction to finance trade flows.
The TFG team work with over 270+ banks, FIs, funds and alternative financiers across multiple geographies and jurisdictions to help companies access finance fast. We have product specialists, from cashew nut experts to scrap metal gurus, who work collaboratively help companies grow their trade lines both internationally and domestically.
Our team of experts are agnostic of finance product types and will look at numerous financing options to help find the best solutions to help you grow your trade flows. From vanilla trade finance facilities or export finance products right through to complex cross-border commodity trade, our 24/7 team are here to help you grow.
We’re often regarded as a CFO or FD, as opposed to an originator or broker of trade finance. We know you’re busy running the business, and our dedicated account managers work around the clock to help place you with financing structures as quickly as possible. We’re your partners in trade and work with the majority of funders in most jurisdictions around the world.
At Trade Finance Global, we know who the decision makers are, the key influencers and managers at banks, financial institutions and funds, so it’s often easier and faster to get to the right person quickly and speed up your application. All at no cost to you.
We’re 100% independent & impartial: working only for our businesses
Trade Finance Global have no ties with any one lender, so can be flexible at offering the product that’s right for you, not an off the shelf product that inhibits growth or limits opportunities for your business, 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 solutions for your business.
Export factoring (companies receive funds against invoices or accounts receivable)
Forfaiting (purchasing the receivables or traded goods from an exporter)
Export credits (to reduce risks to funders when providing trade or supply chain finance)
Insurance (during delivery and shipping, also covers currency risk and exposure)
Why is trade financing important?
Trade financing (also known as supply chain and export finance) is a huge driver of economic development and helps maintain the flow of credit in supply chains. It is predicted that 80-90% of global trade is reliant on trade and supply chain finance, and is estimated to be worth around USD $10 trillion a year.
As a result of the global economic crisis in 2008, export markets reduced in size by around 40-50%, SMEs being the hardest hit. As a result, lending decreased as investor’s appetite for risk decreased, and banks had to reduce the sizes of their loan books.
Who benefits from trade finance?
Export finance has many beneficiaries: developing countries, governments, small and medium enterprises. SMEs are engines for economic growth and development, accounting for around 99% of businesses, 50% of employment and driving around 30% of private sector revenue in the UK.
In relation to export finance and the supply chain, many SMEs play a large role in the running of multinational corporations and larger companies. SMEs require access to finance to fulfill larger contracts, import goods from overseas and create wealth, jobs and develop economies.
Cash and working capital are key to the success of any business. Trade finance often helps make a company’s goods or receivables work for them, freeing up and releasing working capital that is tied in stock. Why does this help? You can suddenly offer more competitive terms to win your next business, not be tied by late payment or lengthy delays between shipping an order and receiving payment, which is ultimately good for growth and good for your customers. 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 or bigger orders from suppliers, meaning businesses can easily benefit from economies of scale and bulk discounts off volumes. The margin benefits of using trade finance to grow a business can help win competition and increase revenue. Trade finance can also help strengthen the relationship between buyers and sellers, increasing profit margins and profits
More efficiency in trades and supply chain
Managing the supply chain is so important for any business. Trade and supply chain finance helps ease out cash constraints or cash gaps, whether it’s the suppliers, customers, third parties, employees or providers, trade finance can help ease and release working capital from the supply chain
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
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.
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.
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.
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.
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.
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
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
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
“Supporting a family-run business with a strong business model and credible trading facility was key and allowing them to strengthen relationships with suppliers, should allow the company to scale with this new line of business.”
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.
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.
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.
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?
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.
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.
What are the challenges for SMEs in accessing trade or export finance?
From the banks perspective, as the regulation burden (i.e., Basel III) has become heavier, SMEs often don’t fulfil certain criteria for banks to justify lending to. As lending money has an associated transaction cost, it is more costly to assess and monitor loans to a smaller, riskier company where profit is less certain, relative to a larger, more profitable and stable business.
Banks will often ask for the following from any company when filling out an application for any type of business finance:
Audited financial statements
Full business plans
Details and references of the directors
Information on assets and liabilities
As well as the cost of lending to SMEs being less profitable for banks, there is a much higher default risk and chance of bankruptcies with SMEs in comparison to larger firms. The other challenge banks have in lending to SMEs is the lack of security and collateral an SME can provide.
SMEs also face challenges in accessing finance from banks. In a recent survey by the British Business Bank, 46 percent of SMEs were looking to grow in the next 6 months, yet awareness of types of finance available and finding sources of finance (especially after being rejected from a bank) are major concerns amongst SMEs. The perceived high cost of borrowing, lengthy procedures for securing a loan and also the amount of paperwork and documentation required is often off-putting and cumbersome to SMEs.