Trade Finance

Trade Finance is a form of working capital solution. It usually refers to financing facilities that enable and ensure cross-border transactions, such as imports and exports.

For importers, Trade Finance provides funding to pay overseas suppliers, bridging the working capital gap caused by the time between paying for goods, receiving them, selling them, and turning them into capital.

For exporters, Trade Finance allows payment to be received for goods or services provided, even before delivery. Exporters may also benefit from export factoring or bill facilities for financing overseas credit, supported by a letter of credit to secure transactions and reassure both parties – facilitating the formation of new trade partnerships.

There are four main aspects of Trade Finance that work together to support international and domestic trade transactions.

1. Payment
   Trade Finance solutions facilitate payments internationally (and domestically). The fast transfer of funds can help ease cash flow gaps and protect both parties from non-performance risks.
2. Risk Mitigation
   The conditions of payment in a Trade Finance arrangement help mitigate the inherent risks involved in international trade for both the buyer and the supplier.
3. Financing
   Trade Finance funding can be used to support every stage of the transaction: for suppliers – they receive payment faster, for buyers  they avoid cash flow gaps. More trust can be built in the relationship from both sides.
4. Information
   Miscommunication is one of the main causes of disputes between buyers and suppliers. Trade Finance ensures clear and consistent communication and minimizes confusion, so both parties can trade with confidence.

For importers, purchasing goods or services from a supplier with no payment terms or short payment terms can create a working capital or cash flow gap. This gap can disrupt operations and hinder expansion and growth.

Trade Finance bridges this gap so that the company is neither out of pocket nor unable to access the required cash to continue operating as normal.

There are numerous benefits to Trade Finance for importers:

• It is more flexible than business loans or overdraft facilities.
• It allows businesses to retain access to working capital even while their goods or raw materials are being shipped from overseas.
• It enables trading partners to save money by negotiating bulk buying or early payment discounts from their suppliers.
• It ensures the smooth running of international transactions, supported by ScotPac’s overseas trade advisors, such as those in Guangzhou, China.
• It provides quick access to reliable funding. With secure access to funds, businesses can accept and fill large orders, access bulk discounts, take advantage of seasonal sales cycles, and maintain their stock levels.

For exporters, a Trade Finance facility can help bridge the gap between the manufacturing and supplying of goods and the time at which payment is received.

The time between production expenditure and incoming payment can similarly disrupt ongoing business operations. Trade Finance bridges this gap so that the exporter is not out of pocket while the importer does not need to pay for the goods prior to receiving delivery.

There are numerous benefits to Trade Finance for exporters:

• More capital can be freed up during manufacturing without waiting for payment.
• It ensures exporters are paid quicker and more reliably.
• It allows upfront payments to secure mutually beneficial discounts.
• It enables faster application processes with less red tape compared to traditional loans, ensuring a smoother process.
• It offers flexible lines of credit that can grow in sync with your business.

Trade Finance helps businesses on both ends of the trade transaction build trustworthy relationships for international trade while ensuring there are no prohibitive risks to their cash flow. Exporters and importers can enjoy healthy access to the working capital they need to accelerate growth and ensure success.

There are generally four ways to finance a global trade transaction between a buyer and a supplier:

1. Letters of Credit

2. Documents Against Payments

3. Telegraphic Transfer

4. Invoice Finance

A letter of credit is a financial facility that reduces risk for both the supplier and the buyer by guaranteeing payment. Specific letter of credit arrangements may include certain conditions that need to be met, such as when goods are shipped or when the buyer receives the goods.

For the buyer, it provides reassurance that the goods paid for will be manufactured and shipped on time before payment is released to the supplier. For the seller, it ensures that manufacturing and supply will be paid for promptly without having to wait for the buyer to receive delivery.

Documents Against Payments are a type of Trade Finance mechanism where the supplier receives payment in exchange for providing the shipping documents. This offers sufficient protection to the supplier by ensuring funds are available to pay for the ordered goods. At the same time, it protects the buyer by guaranteeing that the supplier has shipped the goods before receiving payment.

A Telegraphic Transfer – or TT – is one of the most widely used payment methods in Trade Finance solutions. In short, it is an electronic transfer of funds to a recipient’s bank account. Since many suppliers require an advance payment before manufacturing goods (especially during the establishment period of a trading relationship), a TT ensures that funds are provided quickly and on time.

Invoice Finance allows businesses to leverage their accounts receivable, or outstanding invoices, as collateral to access near-instant working capital. With up to 85% of the value of outstanding invoices available upfront, it provides a simple and fast way for businesses to boost cash flow. The remaining balance is released once customers pay the invoice and settle their accounts. Combined with Trade Finance, Invoice Finance enables businesses to unlock capital that would otherwise be tied up due to delays in shipments or manufacturing processes.

Yes, both international and domestic trade involve inherent risks for both the supplier and the buyer. The supplier needs reassurance that the buyer can and will pay for the goods, while the buyer needs confidence that the goods will be manufactured, delivered on time, and meet the required specifications. Trade Finance helps mitigate these risks.

For instance, a letter of credit provides assurance to the supplier that they will be paid for the goods produced and gives the buyer confidence that payment will only be made once the specified conditions are met. When these conditions are satisfied, payment is securely issued to the supplier.

Trade Finance and Supply Chain Finance are both financial solutions that facilitate trade and help buyers and suppliers. They both allow businesses to manage access to working capital and to mitigate risk. But there are some differences that make each solution more or less suitable for different businesses, depending on the circumstances.

Supply Chain Finance is typically utilised when the buyer and supplier have a prior history of trading. In this case, the buyer usually has a stronger credit rating than the supplier and then agrees to approve the financing of their supplier’s invoices to increase liquidity for both businesses.

Trade Finance offers more risk mitigation for suppliers and buyers. This is especially necessary in instances where there is no prior history of business. For example, letters of credit and documents against payments are two tried and tested ways trade finance can mitigate risk and increase the level of confidence for both parties.

Third-party finance companies providing funding can significantly reduce the risks associated with trade financing. However, even with Trade Finance, there is always some level of inherent risk in international trade, and it’s essential that these risks are carefully considered.

The Risk for Buyers

The buyer’s primary risk is that the supplier may not deliver the purchased goods on time or to specification as outlined in the terms of the contract. This risk is heightened once payment has been received.

To mitigate this, finance companies like ScotPac conduct thorough due diligence on the supplier’s track record. They may also require Documents Against Payments before transferring funds or issuing payment.

The Risk for Suppliers

For suppliers, the primary risk is whether the buyer is capable of providing payment for the goods ordered. A strong credit rating and financial track record are key indicators of the buyer’s trustworthiness. In such cases, ScotPac, as the finance facility provider, may issue a Letter of Credit to mitigate the risk of non-payment.

Additional Risks

In addition to the primary risks, other external factors such as foreign exchange fluctuations, geopolitical tensions, and international sanctions can impact trade and disrupt smooth transactions.

No, Trade Finance is not a type of loan. Trade Finance solutions in Australia are formal arrangements with a third-party financier to provide short- or mid-term funding. This arrangement enables transactions to occur without either the buyer/importer or seller/exporter experiencing cash flow gaps or shortages.

With Trade Finance, suppliers can access funding in advance by leveraging their unpaid invoices. Buyers, on the other hand, can access credit to cover the upfront cost of purchased goods.

When it comes to trade opportunities, the ScotPac team understands the importance of being agile, flexible, and quick. Our Trade Finance funding facilities can provide approval in as little as 24 hours, helping you access funds as quickly as possible. Please note, this timeframe is subject to the terms of your credit arrangement.

The cost of Trade Finance depends on the type and duration of the facility. At ScotPac, our clients benefit from competitive, market-leading rates. With tailored solutions designed to meet your unique needs, you can be confident you’re getting the best value for money. Speak to our lending specialists today for a personalised quote.

There are two ways to apply for a Trade Finance facility with ScotPac: either fill out our quick enquiry form here or call us today on 1300 850 322

Our lending specialists will work with you to find the right solution tailored to your business needs and goals. If you need assistance negotiating with international suppliers or manufacturers, we can connect you with our local trade advisors in Australia or China, who will be happy to help.