SME Finance | 2020 SME Trade Finance Guide

SME Trade Finance Guide

SME Finance | 2020 SME Trade Finance Guide

Welcome to the SME Trade Finance hub. Trade Finance Global (TFG) have partnered up with a number of associations and institutions to bring you this SME Trade Finance Guide. The guide is aimed to help small and medium-sized enterprises (SMEs) learn about, and access finance for trade, importing and exporting goods. So whether you’re a seasoned trader or a first time importer/ exporter, we hope this primer can help introduce you to the world of trade finance.

What is trade finance?

Trade Finance is the financing of goods or services in a trade or transaction, from a supplier through to the end buyer. It accounts for 3% of global trade, worth some $3tn annually.

‘Trade Finance’ is an umbrella term, which includes a variety of financial instruments that can be used by an importer or exporter.

These include: Purchase Order Finance, Stock Finance, Structured Commodity Finance, Invoice Finance (Discounting & Factoring), Supply Chain Finance, Letters of Credit (LCs) and Bonds & Guarantees.

The terms Import Finance and Export Finance are used interchangeably with Trade Finance.

In order to address some of the common issues and misunderstandings around Trade Finance, we have put together this short guide.

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    What’s in the SME Trade Finance guide?

    The guide describes the main types of trade finance structures available to SME importers and exporters, outlines the methods of payment, risks and challenges, and shows how to access trade finance from various lending sources.

    • Why is trade finance necessary?
    • Who benefits from Trade Finance?
    • What are the main benefits of Trade Finance?
    • Types of Trade Finance
    • Methods of Payment in Trade Finance
    • Pre-shipment, Post-shipment and Supply Chain Finance
    • Risks and Challenges in Trade Finance
    • Types of Trade Finance Lenders
    • How to Secure Trade Finance
    • How to apply for a Trade Finance facility

    Contribution Partners for this guide

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      Frequently Asked Questions

      Why is trade finance necessary?

      Trade Finance (also known as Supply Chain Finance and Import & Export Finance) is a massive driver of economic development and helps maintain the flow of credit in supply chains. It is estimated that 80-90% of global trade, worth $10 trillion per year, is reliant on trade and supply chain finance.

      Who benefits from Trade Finance?

      Trade Finance has many beneficiaries, from Corporates to Small & Medium Enterprises (SMEs), and countries/ governments.

      Companies use Trade Finance to increase the volumes of goods and services which they trade, fulfil large contracts, and scale operations internationally.

      Governments also assist with guaranteeing trade finance, as they aim to increase the trade of goods and services.

      What are the different types of Trade Finance, available to SMEs?

      ‘Trade Finance’ is a catch-all term for the financing of international trade. Below, we have briefly summarised the main trade finance products which are available to businesses.

      There are several different types, but these are generally categorised as:

      • Trade Credit
      • Cash Advances
      • Purchase Order (PO) Finance
      • Receivables Discounting
      • Term Loans
      • Other types of Business Finance
      What are the different Methods of Payment for SMEs in Trade Finance?

      In trade transactions, payments need to be made in a secure and timely manner. When establishing a new relationship, buyers and sellers usually use intermediaries, such as banks, to limit risk. The intermediaries can guarantee that payments are made on schedule. As trust develops between a buyer and seller, businesses may switch to cash advances or providing trade credit on open account terms.

      Payments in trade finance have varying types of risk: for the importer and the exporter. In this section, we may consider the importer as the buyer and the exporter as the seller.

      In this SME Trade Finance Guide, we cover 4 types of payment methods: cash advances, Letters of Credit (LCs), Documentary Collections (DCs) and open account sales. As a business owner, it is important to understand the different risks for each type of payment method, to see which one is most favourable and suitable for your business requirements.

      Has Covid-19 pandemic made SME access to finance harder?

      The Covid-19 pandemic has exacerbated the challenges for SME access to trade and export finance as financing providers perceive a jump in supply chain disruptions and increased non-delivery and non-acceptance risks. However, in many countries supplying the UK, default risk on trade-related short-term financing remains relatively constant at around 2%[1] and trade in some sectors is at levels above those of the same period in 2019. This is why we are launching the Guide now.

      How can we help?

      The TFG team works with the key decision-makers at 270+ banks, funds and alternative lenders globally, assisting companies in accessing trade & receivables finance.

      Our international team are here to help you scale up to take advantage of trade opportunities. We have product specialists, from machinery experts to soybean gurus.

      Often the financing solution that is required can be complicated, and our job is to help you find the appropriate trade finance solutions for your SME.

      Read more about Trade Finance Global and our global team.

      Download our free SME trade finance guide



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