Designed specifically to facilitate international B2B transactions, the various forms of trade finance available can be ideal for firms who import, export, or want to start trading with foreign companies.
Depending on what form of finance you chose to bankroll your company’s trade, you might use a bank, an alternative lender, a specialist export finance firm or a cash flow finance fintech provider. On the whole, trade finance is always designed to simplify the trading process for you and neutralise the risks associated with exporting and importing – but it’s useful to understand the various forms trade finance can take, and the features to look out for.
Here are the key terms you need to know about trade finance:
Import finance is a form of business funding designed specifically to fund exports in the short term – usually by closing the cash flow gap between shipping goods and getting paid – and to eliminate the risks associated with buying from abroad.
This import financing can take several forms, from invoice factoring and supply chain finance solutions to bank guarantees, letters of credit and asset-backed facilities. Although technically different, what they all have in common is that they ensure an early payment to the foreign supplier while removing the risk of currency fluctuation, and non-shipment from the buyer.
Import finance is therefore a relatively short term form of business finance, with the buyer only putting the facility in place for the period required to cover the transaction. This generally ensures the cost is lower than arranging longer term finance, while significantly improving cash flow management and helping with the logistics of foreign trade.
Export finance refers to a business funding arrangement which is designed to facilitate international sales. A good export finance solution will not only help the seller to cover the cash flow gap between shipping goods and getting its invoice paid, but will also seek to de-risk the process and smooth the bureaucracy.
The actual financial arrangements involved in export financing can vary. In some cases, pre-shipment export finance allows a firm to raise money in order to complete the order, long before an invoice can be sent. On the other hand, invoice discounting and export factoring depend on an invoice being issued, but can be designed not only to speed the payment but to guarantee it as well.
Like import finance, export finance is usually a short-term financing solution covering a specific B2B transaction, so you are not paying for funds you don’t need.
Letter of Credit
This is a letter from a bank or specialist financier guaranteeing payment for a supply of goods or services. If the goods are shipped and the buyer fails to pay at an agreed time, the financier will have to foot the bill.
By arranging a letter of credit, an importer effectively de-risks the export process for its supplier, and depending on the arrangement it should also be able to reduce the risks to itself in terms of non-shipment, as it can still wait for verification before paying.
However, a letter of credit on its own still leaves many of the arrangements for the buyer and seller to organise and agree; it doesn’t offset currency risks; and it does not plug the cash flow gap associated with exporting and importing.
Purchase Order Finance
Also known as ‘PO finance’, purchase order finance provides funding for businesses against the value of a purchase order. This is designed to smooth out cash flow by allowing a firm to pay its suppliers and staff as it prepares the order for shipment.
Much like other forms of cash flow finance, purchase order finance can be very flexible and is not dependent on a business’ past performance or credit history. Instead, it can grow rapidly if demand for your product is also rocketing.
PO finance is therefore a good solution from a cash flow point of view, but it does not necessarily de-risk the import or export process; and on its own it offers no hedge against currency or help with logistics and international red tape.
Smart Trade Finance
Thanks to fintech, businesses can now build their own tailored smart funding solutions for imports, exports, or both. For example, you could use an online fintech platform like TIM to arrange specialist export financing in order to de-risk your overseas sales and cut out the final wait for payment. And at the same time, you could arrange for import finance or supply chain finance in order to help scale up your supply chain and fund the necessary purchases.
Sophisticated, smart business funding solutions such as these are what TIM specialises in. Tim’s sales solutions staff can build a tailored funding package for most trading businesses. These solutions will actually enhance cash flow while offering great value trade finance so businesses can make the most of their opportunities and enjoy healthy, profitable growth.
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TIM Finance offers several different funding solutions (Services), one or more of which has a no-fee, no interest and no long lock in contract period, called the Fully Flexible funding option. Conditions, fees and charges apply to some of the Services provided, which may change or we may introduce new ones in the future. Full details for all funding options (Services) including any fees and charges which may apply, is available on request. Lending criteria apply to approval of credit products. This information does not take your personal objectives, circumstances or needs into account. Consider it’s appropriateness to these factors before acting on it. Read the funding agreements provided, for your selected product/service, including all the Terms and Conditions contained in agreements provided, before proceeding. *T&Cs: Minimum 12 month invoice funding contract with TIM Finance. Direct clients only, offer doesn’t apply to broker introduced clients. All standard credit terms and conditions apply including credit assessment. Not applicable to existing clients.