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Gaining a large customer order can be both an exciting and daunting opportunity for a business. Having to pay suppliers for stock up front could have a huge impact on your cash flow, especially when delivery dates are weeks away. This could limit your expansion plans or see you decline orders because you can't pay for the goods in advance. Using a Trade Finance facility can provide an additional source of working capital, bridging the gap from supplier payment to the receipt of goods.

Trade Finance

Trade Finance

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What is Trade Finance?

In its simplest form, Trade Finance is additional cash to pay suppliers. The suppliers can be either overseas or UK based. A Trade Finance facility enables payments to be made to suppliers where you cannot agree credit terms with those suppliers to buy the stock. It tends to be a short term revolving facility where funds are paid /repaid over a 90/120 day period. Several transactions can run concurrently within an overall facility limit. A trade finance facility generally complements other lending you may have from the bank; it does not usually require the bank to release security.

How does trade finance work?

  • You raise the PO on your supplier, requesting the supplier to raise an invoice in favour of the Trade Finance provider
  • The supplier sends the invoice to the finance company for direct payment
  • Up to 100% of landed cost of goods can be financed – generally in line with already agreed payment terms including deposits prior to manufacture. Payment in currencies is standard
  • Once landed stock is typically moved and stored with your own providers, the finance company may require to be noted on relevant transit and warehousing insurance policies
  • Once the goods are sold repayment is required either via your cash flow or debtor finance (if appropriate) 
  •  Each transaction should be repaid between 90 and 120 days
What are the benefits to using Trade Finance?
  • Additional purchasing power with your suppliers
  • May allow a renegotiation on purchase price of goods if you are able to pay more promptly as a result of having the finance
  • Enables you to sell goods in the knowledge that you will have the ability to source supply without the fear of running out of cash
  • It is generally an addition rather than replacement to existing funding in your business
What are the criteria needed to gain a facility? 

Lenders criteria differ but in the main the following are required;

  •  UK registered limited trading companies with UK resident Directors
  • Minimum 12 months trading history evidencing purchase of goods from supplier who you wish to finance
  •  Gross margins on the sale on product >20%
  •  Personal guarantees are typically required to cover up to 100% of the value of the facility
  • Guarantors to the facility should be homeowners with equity in UK property
  • If your business is wholesale then credit worthy customers will be required, an assignment of debt to allow your customers to repay the finance company directly may be required
  • Retail businesses can be financed but there are fewer lenders prepared to take the risk
  • Some lenders require sales orders to be in place before paying suppliers, other lenders are happy to purchase for stock 
What security will my business have to provide?

Typical security over the business consists of a debenture behind the Bank (if appropriate) and Personal Guarantees. The lender will also have rights over the goods they have financed. Depending upon the size of the facility the lender may seek to support personal guarantees via legal charges over a business/personal property.

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