Trade Finance or Supply Chain Finance refers to finance that is used to finance the trade of goods or services. Trade Finance can be used to describe financing of imports or purchases (called Import Finance or Inventory Finance) or to describe the financing of exports (called Export Finance or Purchase Order Finance).

How Does Trade Finance Work?

The purpose of trade finance is to increase liquidity for businesses and to improve the management of risk to facilitate trade. Trade finance introduces a third-party into a transaction between a buyer and a seller. The seller can maintain working capital through invoice financing and guarantee they will receive payment while the buyer can fund the purchase of goods and ensure they are shipped before payment is released.

Why Businesses Need Trade Finance

Both buyers and sellers can benefit from trade finance.

For buyers, an investment in goods can make a significant dent in working capital. This can be a considerable problem for importers purchasing goods from overseas. Being able to access trade finance allows importers to fund the purchase of goods and generate revenue without suffering cash flow gaps while waiting for goods to arrive.

For suppliers, working with a large client or offering extended payment terms can result in a shortage of working capital. Trade finance enables companies to release the capital tied up in the manufacturing and shipment of goods.

A lack of cash flow is not the only reason companies need trade finance. Many large businesses with sufficient liquidity seek trade finance to mitigate the risk involved with international and domestic commerce.

How Trade Finance Can Reduce Risk

Trade finance helps to mitigate risk by accommodating the conflicting needs of the buyer and seller.

The seller would prefer to receive payment upfront to avoid the risk that a buyer will be unable to pay for goods once they have been shipped. While the buyer would prefer extended payment terms to ensure the goods are shipped and to avoid the risk of paying for goods that are not received.

A trade finance solution can be used to reduce the risk for both parties. For example, a letter of credit can be used to ensure that payment is only released once the supplier has presented the bill of lading to the financier. The letter of credit offers the seller a guarantee that the goods will be paid for once they are shipped.

The Benefits of Trade Finance

Aside from risk mitigation, trade finance offers many benefits for businesses looking to purchase and sell goods in Australia and around the world.

A funding facility helps to increase liquidity and avoid any cash flow gaps. You can pay your overheads and be confident that you have the financial backing to take on new orders. You may be able to offer extended payment terms to your customers, or secure bulk buying/early payment discounts from your suppliers to increase your margins.

Trade finance empowers SMEs with the capital they need to increase the turnover of goods, secure deals with larger customers, and scale revenues to increase profitability.

Import Finance

Import finance is a trade finance solution for businesses that purchase finished goods from overseas or domestic suppliers. The funding is linked to an invoice finance facility to provide a line of credit of up to 180 days. You can fund the purchase of goods and repay the amount owed using outstanding customer invoices.

The goal of import finance is to improve the purchasing power of importers by giving them the option to defer part or all of their purchasing costs until they realise a profit from sales.

Import finance is frequently combined with a letter of credit arrangement to simultaneously offer the importer both greater flexibility and protection against risk factors.

In simple terms, here’s how import finance works.

The buyer will apply for import finance with a financial institution. Once approved, a letter of credit or telegraphic transfer will be initiated, and the seller will produce and ship the ordered goods.

The seller will be paid by the buyer’s financial institution and an import bill will be created.

Once the goods are cleared and reach the buyer, the import bill will be repaid from debtor finance proceeds. The buyer can then clear the debtor finance on agreed terms.

This means the lengthy period between ordering goods and receiving payment is avoided, assisting both the importer and the exporter in doing business. The buyer will also benefit from quicker growth and stronger sales due to the increased purchasing power import finance can offer.


Export Finance

Export finance is specifically designed to help exporters maintain cash flow and increase the speed of sales cycles. You can use your accounts receivables as collateral to access a line of credit. With access to funding, you can produce or manufacture goods for sale and take on new orders rather than waiting for overseas customer payments to clear.

In scaling up operations for export contracts, Australian SMEs typically experience a sharp increase in manufacturing, capital and shipping expenses, the latter often being considerable given Australia’s relative geographical remoteness from larger international markets.

Long payment terms can further exacerbate their working capital challenges. Delays of up to 180 days for cross-border transactions are commonplace.

Using export finance, sellers can receive funding against invoices raised on overseas customers. There are two major benefits here for the exporter. This removes the barrier of tied-up working capital and alleviates transitional financial pressures.

It also means the exporter can trade on open account terms (usually utilizing export credit insurance for added security), thus reducing a critical barrier to international sales.

Export finance is often offered as part of a comprehensive package of services, known as export factoring. With this package of services, rapidly available export finance is provided against invoices. Additionally, collections and international bookkeeping services can be built into an export factoring service, making it an excellent option for SMEs just starting out with exporting

Trade finance is a crucial tool in paving the way for international business. Not only does it open the opportunity for risk mitigation, it offers importers a solution to cash flow challenges and exporters the required capital to fund their expansion.

Trade finance covers a range of financial solutions that can be tailored to the needs of importers and exporters. Multiple financial products can be used together to facilitate trade and ensure a smooth transaction.

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