This content was last reviewed on 11 July 2022
As COVID-19 restrictions come to an end, the use of digital tools in businesses has become the go-to strategy for any growth plan, and this is true for small businesses, as well. While the pandemic had devastating effects economically, the one bit of good news is that this shift to digital will help the global flow of goods and services for years to come.
In their latest global survey on trade finance, the ICC found that by April 2020, banks across the globe were not only scaling up existing digital solutions, but some 55% of respondents were in the process of rolling out new digital solutions.
What is trade finance?
Adrian Innes from FSB Funding Platform is an expert in trade finance. We caught up with him to find out more about trade finance, the key things to remember as a business owner and where you can find more support. Download the SME Trade Finance Guide that Adrian mentions here.
What do small business owners need to know about trade finance?
Trade finance is an umbrella heading for a multitude of things. Predominantly, anyone who imports or exports will have cash flow issues, because it’s about understanding the cash flow cycle.
Let’s say you’re a widget manufacturer, for example, and you’re buying a piece of steel. You have to purchase that steel, get it to your manufacturing site, employ people to cut that steel up into small bits, paint it yellow, blue, green, black, add dots to it… and then have a finished product. You’ve then got to sell that finished product.
So, when you look at a cash flow cycle from the day you buy that steel, you may have 30, 60, 90 days to pay for that from your supplier. But you still have to pay wages, your overheads, rent, heating, light, manufacturing costs etc. When you sell it, you customers may have 30, 60, 90-day terms so therefore you have a cycle of when you pay out to when you’re getting that money back to allow you to buy more.
It can be a viscous cycle and some businesses overtrade. They’re busy, but they’re not managing their cash flow cycle effectively. So, when they need to pay the bills, their money is tied up in the balance sheet, such as stock, creditors, debtors or work in progress. It’s understanding the different levers you can pull to release capital and cash. I’ve never seen a business go under that has had a lot of cash, but I’ve seen businesses go under that are incredibly profitable but don’t have cash or don’t manage that cycle effectively.
When you look at trade finance, it’s a multitude of different options for what you need that finance for. Are you paying suppliers too early? If your supplier gives you 90-day terms, are you paying in 30 or 60 days? Although it may be that you’re entitled to an element of discount if you pay in advance. And what about your debtors, those that are buying goods and services from you: are they paying in the 90 days? We know that some companies in the UK will have a financial controller that will say, “Is it 90 days from invoice, delivery or whenever?” You’ve got to bridge that gap between the trading cycle and when that revenue is generated.
There’s a number of different fundable products out there that can cover trade like purchase orders, sales orders, invoice finance, term debt. The key thing is to understand the reason why you need the money. When people talk about trade finance, they sometimes say, “I need working capital”. Again, working capital is the ability to free up cash to allow you to pay your bills and transact accordingly.
Options include trade credit, purchase orders, receivable discounts, term loans, letters of credit, document collection and open credit. All of these things, in a round about way, mean exactly the same thing. All you are doing is facilitating the release of cash or a delay in having to pay cash, to make sure you have enough cash to continue to transact.
If you’re importing or exporting, it could be that you’re having to pay for your goods when they’re shipped. The shipping time from Singapore, for example, it may be 8 to 12 weeks before the goods are docked and you get hold of the goods so you can sell them on and make money.
Trade finance isn’t purely for import and export. It’s for anybody who trades and there’s a delay between selling your goods and receiving the cash for those goods. In relation to trade finance, it doesn’t need to be tangible. You could be selling a service which is a commodity being purchased by someone who needs that.
We’re fortunate enough through FSB Funding Platform to have 136 funders on our panel, a lot of whom will transact in trade finance.
One particular item of trade financing is invoice discounting. That’s where you issue an invoice, and you’ve paid for your goods or delivered your service in advance, and it might be 120 days that your customer is taking to pay you. And it may be longer as we’re going through difficult times with the pandemic. This is where you can go to a funder and they will pay you in advance against the invoice. The initial pay out could be up to 95 per cent of that invoice. As soon as you have sold your goods and they’ve been delivered, the invoice is real and the invoice discounting finance will provide 95 per cent of that invoice now and the other 5 per cent when that invoice is paid in full. There is interest and charges associated with any line of finance you’re going into.
How do I know if my business is ready and prepared to take on trade finance, or if it’s right for me?
One of the great things about FSB Funding Platform is that I’ve got 35 years’ experience. If you’re coming to the FSB Funding Platform, you’re getting me. We would discuss your business and we’d have a look at your financials.
We’d look at your cash flow projection, if you’ve prepared one – a lot of businesses don’t and just look at their annual accounts nine months after the year has finished and don’t know where their business is running. Today, with digital VAT, everybody should be using some sort of computer software or accountancy software that can give you management information at the press of a button.
My advice is to speak to an expert who can advise you on the best type of finance that is suitable for your requirements. We’ve got 136 lenders on our panel, some of them will do invoice finance, some will do what’s called revolving credit facility, some will do overdrafts, some will do term loans. If we can truly understand the purpose of why you need that money, we can provide a funder that has the correct product suite for what you’re looking for.
A lot of purchase orders or trade credit terms are normally transactable through a high street bank, where banks potentially provide a guarantee to the buyer or seller, like an old-fashioned chequebook payment on demand. It gives the confidence to transact greater and continue to develop your business.
What impact has the new UK/EU relationship had on trade finance?
It’s more down to trade legislation and also import and export tax. Was there going to be an increase in tax in relation to import or export? Were the countries you were exporting to going to have to pay more? It affects your ability to sell and your marketability. But there’s a range of businesses who import and export who have had to come to terms with the legalities or restrictions on how they import and export.
What other recommendations do you have for small businesses?
Try and get as much advice as possible. There are a lot of good local government agencies who provide specific advice. In consultation with FSB, we have a guide called ‘Trade Finance Explained’ which takes it down to the bare bones of global trade finance. But we need to remember that trade finance isn’t only import and export to Singapore, Japan, China etc., it can also be internal between Scotland, Wales, Northern Ireland or England.
Is trade finance right for my business?
Obtaining good credit terms from your suppliers can be difficult at the best of times. And with finances stretched everywhere right now, it is best to not lock up cash when you don't need to. Trade finance can bridge funding gaps between paying your suppliers and getting paid. And with the right provider, you get helpful tools to set your business up for growth.
With external funding available to buy goods, you can negotiate better terms with your suppliers. And you have less headache from the wait for customers to pay you. This principle can be applied to commercial transactions both domestically and internationally.
- Import: gives companies the opportunity to buy goods abroad and close the cash flow gap between paying suppliers and having their customers pay them.
- Export: For companies of all sizes, selling abroad is a great option to take your business to the next level, but it also presents many challenges, especially in these changing times. Export financing helps companies selling abroad to reassess outstanding invoices. You can get additional support by collecting payments from clients.
How does trade finance work?
- You get approved for a credit limit by your preferred funding provider
- You place your order with your supplier
- The funding provider pays your supplier against shipping documentation or a letter of credit
- The goods are shipped and delivered to your customers
- You repay the transaction within 90 days from the transaction date or through the use of Invoice Finance
- Your funding provider will recalculate the funds available to you after every transaction so you always know where you stand
If the above sounds complicated, then be assured that the advances in digital tools takes care of many of the administrative chores of old. The key to successful growth is selecting the right funding provider for your business. One that understands your trading patterns and the amount of working capital that you need as you expand your business.
What are the advantages and disadvantages of trade finance?
- Easy way to arrange short-term finance.
- Your business can focus on growth activities.
- Finance is typically secured against the goods or backed by an insurance policy.
- Based on having a good track record in terms of operations and repayments, so is less accessible for new companies.
- If payments are not made on time, it can become very expensive.
I import and export goods and want to increase my working capital, is trade finance right for me?
It’s relatively easy to secure short-term finance if you have a strong trading record, secured against goods or backed by an insurance policy. It removes the payment risk and supply risk – the exporter gets good sooner, and the importer benefits from extended credit.
Find the right trade finance
FSB members can access the UK’s largest panel of business lenders thanks to FSB Funding Platform. We’re 100% transparent about fees and rates, and 100% independent. Our only interest is in making sure you get the right business finance.