A stack of containers aboard ship

What is Trade Finance?

If you are an importer, trade finance allows you to pay for goods, made locally or overseas,  before you receive them.

You pay the financier back along with the fees after you have sold the goods.

If you are an exporter, a trade facility will provide you with the cash to buy or manufacture goods you are selling overseas.

When you receive payment from your customers you return the funds to the lender.

Some lenders will provide you with a one-off amount to enable a single transaction, others will provide you with a revolving credit line you can turnover with each new deal.   It depends on your needs.

How Do I Qualify For Trade Finance

You should have a strong business, showing profits and no tax or credit issues.

Some lenders provide an unsecured facility, but to qualify your business and your supplier will need to be bullet proof and you will pay more for the funds.

For the most part, some type of security will be requested by the lender.

Exporters will often want security over one or all of the following:

  • The goods which are being exported
  • Business assets
  • Property
  • Personal Guarantee

Importers will need to offer security over the goods being bought and, depending on how the lender assesses risk, possibly other business assets.

 If the lender views the transaction as risky you may be asked to offer real estate and/or a personal guarantee.

What Documents Do I need For Trade Finance?

Apart from those documents which demonstrate the strength of your business, you will need transaction evidence before funds are disbursed.

Importers will need to provide the lender with a copy of the purchase order issued to the supplier and also a copy of  the supplier’s invoice.  

Some financiers will require that you pay a deposit to the supplier, others will fund the deposit early in the transaction and the balance when the goods are ready to be shipped.

The money to pay for your goods will be sent to the supplier once the lender sights a bill of lading  and the insurance policy. 

In some instances, the lender will ask to be noted as a beneficiary on the insurance policy.

If you export, the lender will want to see the purchase order from your buyer and be satisfied that the buyer is a legitimate entity. 

Trade Finance Products and Services

Most trade finance facilities are short-term arrangements which require you to repay funds within a designated period.  In some instances, up to 180 days from funding.

The process by which funds are disbursed depend on your needs and the lender you are dealing with.

There are three main products.

Credit Line:  The lender provides you with a revolving credit limit.  It is generally secured by business assets, property or personal guarantees.  Funds are disbursed by the lender to the supplier’s account on provision of the appropriate documents. 

Letter of Credit:  Your bank promises to pay the supplier once it has received the appropriate documents as spelled out in your agreement.

Bank Guarantee: Your bank acts as a guarantor in case you fail to fulfil the terms of your contract.

How Much Does Trade Finance Cost?

How much you pay for trade finance depends on:

  • The lender
  • The type of facility
  • What security is offered
  • Repayment period  
  • Perceived risk.

The trick is to find a finance broker who specialises in this area and sells products from different lenders.

Don’t go to the first finance broker whose name appears at the top of Google.  This is a specialist area requiring experience and knowledge.

Provide the broker with a good understanding of your business and your needs.