Trade finance, also referred to as either import finance or purchase finance, is funding that is provided to companies to enable them to purchase finished goods. Generally, funding is made available either against the receipt of firm orders from customers or when the demand for a product made by a company is proven. Trade finance co-exists along with other conventional forms of funding such as invoice discounting, bank overdraft and factoring. Other forms of import finance include funding provided against letters of credit and schemes that fund the Vat part of exports.
Trade Finance – Who Does It Benefit
There are a number of potential small and medium enterprises (SMEs) out there in the market that feel stifled because of their inability to raise the funds that they require to foster growth through traditional factoring as well as banking. Such enterprises find it beneficial to utilise the innovative funding facilities offered by several private finance companies. The services offered by these finance companies help meet the funding requirement of the SME sector to some extent. Typically, they provide funding as follows:
- Trade finance for the purpose of importing finished goods
- Purchase finance against firm orders given by customers to meet the need to buy finished goods
- Purchase finance to enable a company procure raw materials that are to be used in the manufacture of products
- Export Vat finance to help companies fund the Vat element in export sales that are recoverable
Trade Finance – Why Should SMEs Consider
SMEs with potential growth possibilities that are experiencing financial difficulties could consider this mode of financing as it enables them to get up to 90% funding, utilise the services of experienced staff members without the burden of employing them and have the peace of mind that the supplier gets paid even before submitting the invoice to the customer, ensuring a lot of relief to businesses in terms of cash flow.
Trade Finance – How Does It Work
The trade financing option works as follows:
- The SME that is in need of the funding receives an order from its customer.
- The SME then sources the required goods from its overseas suppliers. The suppliers raise the invoice for the goods supplied.
- The suppliers also ship the goods to the SME.
- The SME supplies the goods to the customer who has placed the order and raises an invoice. The SME also marks a copy of the invoice to the finance company (such as Regency Factors PLC) that has agreed to provide trade finance.
- The finance company provides funds to the SME after retaining an amount equivalent to the payment that has already been made to the supplier by the SME.
- Once the customer of the SME makes the payment, the finance company releases the amount that was retained earlier.
Summarising, trade finance in the form of purchase finance or import finance is one of the popular methods of funding that small and medium companies having great potential for growth (but are unable to provide the required security for obtaining funding through traditional banking facilities) resort to.