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What is Trade Finance?

Trade Finance: Meaning and Definition

For importers, distributors, and wholesalers, trade finance provides the fast-access cash needed to settle suppliers’ invoices. Designed to bridge temporary financial gaps, a trade financing loan enables you to fulfil your customers’ orders while still maintaining your own invoice payment obligations.

Our trade finance loans are bespoke financial products starting at 1.25% per month, designed to help businesses maintain better control of their working capital. Trade financing works similarly to invoice financing, where a short-term loan is authorised on the basis of pending payments.

If you ever find yourself struggling to pay your own suppliers to fulfil orders from your customers, a trade finance facility could be just the thing for your business.

How Trade Finance Works

Trade finance services are arranged on a confirmed-order basis.

For example, you may receive an extensive purchase order from a customer but do not have sufficient on-hand capital to purchase the inventory needed to fulfill their order. This could leave you in a position where you are unable to fulfill your customer’s order indefinitely or need to delay fulfilment until you can purchase the required stock.

With trade finance solutions, these delays and disruptions can be avoided. By presenting a confirmed purchase order from your customer to a specialist provider, the funds needed to purchase the stock you need can be accessed right away. Issued in the form of a fast-access, short-term loan, trade finance is ideal for addressing temporary financial gaps like these.

For more information on how trade finance works or to discuss your requirements in more detail, contact a member of the team at Rosewood Finance today.

Trade Finance versus Supply Chain Finance

Supply chain finance differs from trade finance in that the latter concerns paying your own suppliers.

With supply chain financing, loans are issued to cover the gaps between issuing invoices to your own customers and receiving payment. Trade finance enables you to pay your suppliers for the inventory you need in order to fulfil your customers’ orders in the first place.

Trade Finance Process:
A Typical Example

Here is a brief overview of how trade finance solutions work in practice:

  • A clothing company operating in the UK is gradually making a name for itself, and order volumes are steadily increasing.
  • The company receives a major order from a potentially important new customer, needing 5,000 units of stock as quickly as possible.
  • Prior to this, the clothing company had been shipping no more than 1,000 units of stock per month on average.
  • Insufficient on-hand capital is available to cover the costs of purchasing the required materials and accessories from the clothing company’s supplier.
  • They approach a trade finance service provider with a copy of the purchase order and submit an application for funding.
  • Approved shortly afterwards, the trade finance company issues a loan to cover the cost of the inventory purchase, enabling the 5,000-unit sale to go ahead.
  • The loan is then repaid in full when the new customer pays for their purchase, complete with a small fee as agreed when the loan is formalised.

The above scenario is far from uncommon in business, where time-critical purchase orders must be met with an equally swift response. Trade finance provides wholesalers, distributors, and importers with the opportunity to avoid losing invaluable business simply due to temporary cash flow discrepancies.

Eligibility, Lending Criteria and Costs

Eligibility for trade finance for UK businesses is assessed on the basis of several key factors. Most trade finance solutions are open exclusively to businesses with an established track record that are able to provide evidence of their generally stable financial position.

The affordability of a trade finance product will also vary on the basis of numerous factors, including your financial position at the time of application.

A typical trade finance deal may attach an interest rate of anything from 1.25% to 3%, applicable every 30 days. Trade finance is issued exclusively as a short-term funding solution, which is why interest is communicated as a monthly rate, not an APR.

Note: While businesses often use trade finance and invoice finance facilities simultaneously, doing so can result in elevated costs and is therefore not always the best solution for all types of businesses.

Trade Finance

What Is Trade Credit?

Trade Credit: Meaning and Definition

Trade credit differs from trade finance in that it offers a more flexible, long-term solution. With trade credit, a business is able to purchase the goods, inventory, and services it requires from its own suppliers on credit rather than with its own capital.

At the simplest level, trade credit in business works similarly to a conventional credit card or overdraft. A trade credit agreement is reached with a supplier, outlining the total amount that can be ‘borrowed’ and the deadline for repayment.

In a typical example, a business may arrange a 60-day trade credit facility with a current supplier with an agreed credit limit of £15,000. With the agreement in place, the business is then able to purchase items and inventory from the supplier up to this maximum credit limit, with no repayment necessary for 60 days.

Trade credit provides businesses with an essential financial ‘buffer’ between their own purchase orders and the procurement of inventory. Where a customer places a high-value order that the business would struggle to fulfil with its own on-hand capital, trade credit can effectively bridge the gap.

For those who provide trade credit facilities, trade credit insurance is available to safeguard against potential losses due to late payments or defaults.

Trade Credit for UK Businesses: Pros and Cons

Trade credit has the potential to be one of the simplest and most cost-effective short-term funding solutions available, where businesses need to cover temporary gaps in their own finances. The flexibility of trade finance makes it particularly appealing, as it is possible to negotiate 0% interest deals in some instances.

Successful trade credit agreements can be great for building trust between two or more businesses through ongoing demonstrations of responsibility and commitment. But as with all types of business finance, there are advantages and disadvantages to consider before finalising a trade credit agreement.

Advantages of trade credit:

  • Trade credit agreements can be comparatively quick and easy to organise.
  • All terms and conditions are highly flexible and tailored to suit each party’s preferences.
  • Almost any business that regularly purchases inventory can benefit from trade credit.
  • Most trade credit agreements are subject to minimal costs, if any.
  • Both businesses have the opportunity to strengthen their credibility and ties.
  • One of the lowest-cost forms of working capital available.
  • There is no risk of broader credit issues in the case of late or missed payments.

Disadvantages of trade credit:

  • Exclusion from advance or early payment discounts.
  • Chance of frayed relationships with suppliers where payments are made late.
  • Competing businesses that pay early may be prioritised.
  • Agreements are generally unregulated and may favour the supplier.

Trade credit is less of a form of additional finance and more of a facility that provides a cash flow advantage. The business is not technically provided with any additional funds but is instead given additional time to pay its debts.

But as a facility to bridge the gap between customers’ purchase orders and procuring inventory from suppliers, trade credit can be both advantageous and highly cost-effective.

Alternative Options to Trade Credit

Where trade credit is not a viable option, there are alternative lines of credit to consider for your business. Examples of this include invoice factoring, cash advance financing, business credit cards, and overdrafts.

There are also instances in which a short-term bridging loan could be useful as a means to bridge temporary financial gaps.

For more information on any of the above or to discuss your requirements in more detail, contact a member of the team at Rosewood Finance today for an obligation-free consultation.

What Is a Revolving Credit Facility?

Revolving Credit Facility: Meaning

A revolving credit facility is a specialist financial product that enables businesses to withdraw money, use it for any required purpose, repay it, and then withdraw it once again at any time. Revolving credit facility providers aim to offer greater flexibility and accessibility than a standard commercial loan would facilitate.

Revolving Credit Facility versus Commercial Loan

The key difference between a credit-revolving facility and a typical commercial loan lies in the number of times the funds can be used.

Commercial loans offer a set amount of money to a company for a specified use, which is then utilised and repaid by an agreed-upon date. With a business revolving credit facility, the money can be used, repaid (in full or in part), and then reused time and time again.

Essentially, revolving credit works more like a credit card or overdraft than a loan. Businesses are extended a line of credit by the provider, which they can use as many times as they like, just as long as they remain within their credit limit and meet the lender’s minimum monthly repayment requirement.

Revolving Credit Facility Example

In a typical working example, a company may have a revolving credit facility of £10,000. The business withdraws £5,000 to buy additional inventory ahead of peak season, upon which interest applies until it is repaid.

Two months later, the business repays the £5,000 in full and once again gains access to the full £10,000 as needed.

Interest is only payable on the amount used, not the full credit limit of the facility.

Revolving Credit versus Credit Cards

A revolving credit facility works similarly to a credit card, though without a physical card being issued. In addition, the credit itself is not used directly to purchase items or inventory.

When a business makes use of a revolving credit facility, the funds needed to finance the purchase (or cover any kind of cost) are transferred directly into their bank account. Revolving credit, therefore, sits somewhere between a commercial credit card and cash advance facilities.

In addition, revolving credit differs from a credit card in that interest usually applies at a daily rate. This means that the more promptly the balance is repaid, the more cost-effective the facility becomes. Personal revolving credit facilities are available, but the vast majority of UK providers specialise in business revolving credit facilities.

Revolving Credit Facility: Points to Consider

All revolving credit facilities are issued as unsecured agreements and may therefore charge higher rates of interest than comparable secured products.

These may include administration fees, arrangement fees, completion fees, and more. All emphasising the importance of shopping around to get a good deal.

Most revolving credit facilities are offered on a strictly finite basis, usually between six months and two years. After which, an automatic renewal may be offered if both parties are happy with the arrangement.

All lenders impose their own unique eligibility requirements, but most of all, credit applications are assessed on the basis of the applicant’s creditworthiness and the general financial performance of their business. Any other debts you are currently repaying will also be taken into account.

Revolving credit facilities for poor credit (aka subprime) applicants are available but tend to attach higher interest rates and borrowing costs than standard revolving credit facilities.

At Rosewood Finance, we can provide you with the objective advice you need to decide which of the available funding solutions is right for your business. Whether you are ready to submit an application or simply curious about how trade finance or revolving credit could work for you, we are standing by to take your call.

Contact our team anytime for an obligation-free consultation, or e-mail us anytime.

FAQ’s About Trade Finance

Can small businesses access trade finance?

Yes, small businesses can access trade finance. Many specialist lenders offer a broad range of products designed specifically for SMEs and start-ups, and they may be able to offer you a better deal than a mainstream lender.

Can trade finance be used to finance domestic transactions?

Most businesses use trade finance for the purpose of reducing the monetary risks associated with international trade, but the facility can, in some instances, be used to finance domestic transactions. A business may, for example, use trade finance to better manage cash flow in domestic supply chains. Trade finance is an umbrella term that covers many financial products and instruments used by businesses to reduce the risk of trading abroad.

What challenges can trade finance specialists help with?

Working with a trade finance specialist can help your business deal with a broad range of potential challenges, including keeping up with complex regulatory issues, making sense of difficult documentation requirements, risks related to fraud or non-payment, and more.

What impact is technology having on trade finance?

Technology has radically altered the face of trade finance for 21st-century business in an entirely positive way. New technologies are enabling providers and businesses to accelerate application screen processes, improve communication standards, and minimise the risk of fraud.

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