BLOG: 21 FEBRUARY 2016
WHAT IS TRADE FINANCE AND HOW COULD IT HELP MY BUSINESS?
In simple terms, trade finance could benefit any business sourcing goods from overseas, and let’s face it, there is no getting away from the fact that we are a nation of importers and are likely to remain so for some time. Right now it is a cost effective time to be dealing with certain parts of the world, as the cost of freight and the appetite of some overseas manufacturers to work with the UK at very competitive prices has not been this positive for quite some time – especially in the Far East.
Closer to home, there continue to be opportunities with our European neighbours, where the majority of goods imported into the UK originate from, with the added benefit that goods can arrive into the UK within a matter of days (rather than weeks when dealing with farther flung shores). This allows deals to turn quickly and a trade finance facility to be particularly cost effective
At Davenham Trade Finance, we look to assist such businesses dealing in finished goods with good margins that are required to fulfil a forward order book or are regular lines sold to regular customers. With the increasing difficulty in SME’s obtaining the more traditional types of funding they have previously been able to access, alternative sources of funding, particularly trade finance, have become essential. This is even more prevalent in the much smaller SME’s – from a new start-up to a £2M Turnover business – and these are the businesses that we are particularly focussed on helping.
So, what are the key triggers that would suggest a trade finance facility might help your business?
How does trade finance work?
Trade finance addresses the cash problem at the front end of a transaction, way before a sales invoice can be raised and finance provided by a more traditional factoring or invoice discounting route. This allows the supplier to receive payment directly, giving complete confidence that the goods have been paid for and will be shipped. At Davenham Trade Finance, we are able to provide 100% of the funding to a supplier and can also cover duty, VAT and freight costs, effectively taking the entire transaction out of the company cash flow.
We know that SME’s put a lot of work into winning orders and into attracting new customers, so it is essential that this hard work does not go to waste through an inability to then fulfil these orders, and a trade finance facility can ensure that this is avoided and that orders can be successfully fulfilled. Where we differ to some of the more traditional lenders is our desire to focus on the strength of the transactions and the quality of the management team, where most other lenders look at the balance sheet and the recent financial performance first.
If a business feels it is restricted by the lack of available cash flow or working capital then it is possible a small trade finance facility may provide a solution that will allow the cash flow to become more liquid, helping the business to take on additional orders and therefore eventually increase both its turnover and profits – which is what everybody wants, isn’t it?
What are the key elements to a trade finance facility?
Although Letters of Credit are still available and used by some overseas suppliers, there has been a move towards paying cash prior to the goods being shipped, and in a lot of cases also the need to pay a deposit when the order is placed. Davenham Trade Finance are able to assist in all of these scenarios and provide the supplier with the comfort that funds are available to pay for goods once they have been produced and are ready to be shipped. We are also more than happy to work alongside existing shipping agents, inspection agents and warehouse & logistics providers, but are also able to facilitate introductions to strategic partners in any of these areas if required.
After reading this, we hope you have gained a more in-depth understanding of what trade finance is and how it works, and if you believe your business could benefit from a trade finance facility, please get in touch for an initial discussion and to explore whether this may be of benefit to your business.
Closer to home, there continue to be opportunities with our European neighbours, where the majority of goods imported into the UK originate from, with the added benefit that goods can arrive into the UK within a matter of days (rather than weeks when dealing with farther flung shores). This allows deals to turn quickly and a trade finance facility to be particularly cost effective
At Davenham Trade Finance, we look to assist such businesses dealing in finished goods with good margins that are required to fulfil a forward order book or are regular lines sold to regular customers. With the increasing difficulty in SME’s obtaining the more traditional types of funding they have previously been able to access, alternative sources of funding, particularly trade finance, have become essential. This is even more prevalent in the much smaller SME’s – from a new start-up to a £2M Turnover business – and these are the businesses that we are particularly focussed on helping.
So, what are the key triggers that would suggest a trade finance facility might help your business?
- A rapidly growing order book requiring an increase in supplier purchases.
- Seasonality within a business that causes spikes in the cashflow at certain times of the year or the trading cycle.
- Short term cashflow “holes” created by the pressure to make supplier payments.
- Winning a one-off deal that is larger than the traditional orders the business writes or bringing on board a significant new customer.
How does trade finance work?
Trade finance addresses the cash problem at the front end of a transaction, way before a sales invoice can be raised and finance provided by a more traditional factoring or invoice discounting route. This allows the supplier to receive payment directly, giving complete confidence that the goods have been paid for and will be shipped. At Davenham Trade Finance, we are able to provide 100% of the funding to a supplier and can also cover duty, VAT and freight costs, effectively taking the entire transaction out of the company cash flow.
We know that SME’s put a lot of work into winning orders and into attracting new customers, so it is essential that this hard work does not go to waste through an inability to then fulfil these orders, and a trade finance facility can ensure that this is avoided and that orders can be successfully fulfilled. Where we differ to some of the more traditional lenders is our desire to focus on the strength of the transactions and the quality of the management team, where most other lenders look at the balance sheet and the recent financial performance first.
If a business feels it is restricted by the lack of available cash flow or working capital then it is possible a small trade finance facility may provide a solution that will allow the cash flow to become more liquid, helping the business to take on additional orders and therefore eventually increase both its turnover and profits – which is what everybody wants, isn’t it?
What are the key elements to a trade finance facility?
- Payment direct to your supplier
- Independent inspection of the goods prior to making the supplier payment
- Gross margin in each transaction must be at least 20%
- Goods must either be pre-sold against a forward order book or be regular lines of goods that consistently sell to regular customers.
Although Letters of Credit are still available and used by some overseas suppliers, there has been a move towards paying cash prior to the goods being shipped, and in a lot of cases also the need to pay a deposit when the order is placed. Davenham Trade Finance are able to assist in all of these scenarios and provide the supplier with the comfort that funds are available to pay for goods once they have been produced and are ready to be shipped. We are also more than happy to work alongside existing shipping agents, inspection agents and warehouse & logistics providers, but are also able to facilitate introductions to strategic partners in any of these areas if required.
After reading this, we hope you have gained a more in-depth understanding of what trade finance is and how it works, and if you believe your business could benefit from a trade finance facility, please get in touch for an initial discussion and to explore whether this may be of benefit to your business.
