Trade Finance

What is Trade Finance?

In its simplest form, Trade Finance is additional cash to pay suppliers. The suppliers can be either overseas or UK based. A Trade Finance facility enables payments to be made to suppliers where you cannot agree credit terms with those suppliers to buy the stock. It tends to be a short term revolving facility where funds are paid /repaid over a 90/120 day period. Several transactions can run concurrently within an overall facility limit. A trade finance facility generally complements other lending you may have from the bank; it does not usually require the bank to release security.

How does trade finance work?

• You raise the purchase order to your supplier, requesting the supplier to raise an invoice in favour of the Trade Finance provider
• The supplier sends the invoice to the finance company for direct payment
• Up to 100% of landed cost of goods can be financed – generally in line with already agreed payment terms including deposits prior to manufacture. Payment in currencies is standard
• Once landed, goods are typically moved and stored with your own premises, the finance company may require to be noted on relevant transit and warehousing insurance policies
• Once the goods are sold repayment is required either via your cash flow or debtor finance (if appropriate)
• Each transaction should be repaid between 90 and 120 days

What are the benefits to using Trade Finance?

• Additional purchasing power with your suppliers
• May allow a renegotiation on purchase price of goods if you are able to pay more promptly as a result of having the finance
• Enables you to sell goods in the knowledge that you will have the ability to source supply without the fear of running out of cash
• It is generally an addition rather than replacement to existing funding in your business

What are the criteria needed to gain a facility?

Lenders criteria differ but in the main the following are required;

• UK registered limited trading companies with UK resident Directors
• Minimum 12 months trading history evidencing purchase of goods from supplier who you wish to finance
• Gross margins on the sale of the product >20%
• Personal guarantees are typically required to cover up to 100% of the value of the facility
• Guarantors to the facility should be homeowners with equity in UK property
• Retail businesses can be financed but there are fewer lenders prepared to take the risk
• Some lenders require sales orders to be in place before paying suppliers, other lenders are happy to purchase for stock

What security will my business have to provide?

Typical security over the business consists of a debenture behind the Bank (if appropriate) and Personal Guarantees. The lender will also have rights over the goods they have financed. Depending upon the size of the facility the lender may seek to support personal guarantees via legal charges over a business/personal property.

What’s the difference between Trade and Stock Finance?

The real difference is that Trade Finance has been designed to support businesses that have either pre-sold the items and will make immediate delivery or at least will do within a very short period of time. Stock finance however, will look to support businesses that may either have a requirement to hold a certain level of stock to keep their customer base happy with regards to delivery times or simply need the raw materials in order for them to produce the end product quicker.

How do I know which facility is right for my business?

From the above information, you should be able to establish what the best product is for your business but we would always encourage you to discuss all options with your accountant to ensure you make the most of your working capital.