Trade Finance – Creative Funding Option for Internationally Active Companies

December 11, 2020 Stan

As businesses continue to source overseas suppliers and open up new markets for their products, the impact on cash flow cannot be underestimated. Companies are now looking beyond traditional bank financing such as an overdraft to more creative methods that allow funding to be provided off the back of existing trade cycles. Businesses can then release capital which can be used to offer customer discounts or extend credit terms resulting in a competitive advantage for their company.

Tracey Davenport, Relationship Director with a leading European commercial bank, encounters this regularly. “Businesses realise they cannot support their suppliers and wait for customer payments from across the globe while taking care of daily operations all from their overdraft. With companies entering import and export agreements in countries like China or India, they need a way to manage these relationships while not putting pressure on their operational cash. The challenge is educating businesses there’s a better way to finance trade than through a limited and potentially expensive overdraft facility.”

Companies continue to outsource their supplier relationships in traditional areas such as the Far East, but new markets such as Poland, Turkey and Eastern Europe offer a lower cost base alternative and faster access to finished goods. The problem many businesses find is having the support of their local bank to provide finance against bills of exchange, letters of credit and trade documentation.

Mr Davenport commented, “Companies expanding into new countries – either through supplier or customer relationships – need to make sure the bank in that respective country is financially sound. The problem many banks have is their corresponding bank network can be very limited which has an overall negative impact. Businesses that look to bridge their funding gap through trade finance have to review the partner banks their suppliers and customers use then find the right bank to work with in their home country.”

Trade finance services can be tailor-made to individual business requirements resulting in enhanced financial management and improved cash flow. For example, by raising finance against documentary credits – companies may be able to benefit from funds being released immediately. With Import Documentary Credit advances, it may be possible to negotiate discounts from suppliers which can help improve gross margin for the business. For an established import/export business, a trade finance solution could provide a low cost non-recourse fixed rate form of finance along with enhanced sales opportunities.

If your business is considering a new business partner or new export country, trade finance is a way to reduce your risk and help improve your profits in the future.