What is the process to secure Trade Finance for my business?
Each lender has specific requirements and criteria which must be addressed before funds can be advanced to a business. Some lenders are more risk-averse than others. The lender type (bank vs non-bank, large vs small) and their risk appetite will also determine the interest rate which is charged to a business and the repayment conditions. There is a clear process when applying for a loan or other trade facility. The main stages of the credit process are outlined below.
How to apply for a trade finance facility
The process starts with a credit application from the business to the lender. When applying for trade finance, the lender will ask for a set of information on the company, the individuals involved (Directors) and details on why the business is seeking debt finance.
Trade finance is typically suitable for businesses which are already active buying and selling (trading), either domestically or cross-border. Therefore, some form of track record is expected, showing trading revenues on past transactions.
The main items will be:
- 2-5 years of Financial Statements (Profit & Loss Statement, Balance Sheet, Cash Flow Statement) and, if available, Management Accounts, Creditors Ledger, Debtors Ledger, Stock Ledger
- Budgets and Forecasts for at least 1 year ahead
- Details of any Assets that the business or Directors own, which could be used as collateral (property, equipment, invoices, etc)
- Details of any Liabilities (loans, overdraft facilities, etc)
- Description of trade cycles
- Current Purchase Orders
- Current invoices from suppliers or clients
Other items may include:
- A Curriculum Vitae (CV) / resume for each of the Directors
- References from banks
- Information on related companies (Group companies, suppliers, buyers, etc)
Generally, a business plan with financial forecasts is essential to show to a banker that your business idea is sound and realistic, that 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
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. This will be alongside the status of suppliers, customers and trade cycles.
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
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 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
To maintain a good relationship with any lender, the business must make debt repayments (including interest) in a timely manner, according to its contractual and legal obligations. This should also protect the business credit rating.
Establishing and maintaining a good reputation as a borrower is key to accessing further funding and larger facilities, as the business grows and trade volumes increase.
Trade Finance Hub
1 | Introduction and the benefits
2 | Types of trade financing
3 | Methods of payment
4 | Pre and post-shipment finance
5 | Risks and challenges
6 | Trade and export finance providers
7 | The credit process and securing finance
8 | SME Trade Finance Guide