Trade Finance Solutions 

The History of Trade Finance

For centuries, banks funded merchants by buying goods that were then taken to the foreign market, repaying the bankers out the proceeds of the sale as the first form of trade finance. These arrangements were supported by documents developed especially to facilitate transactions and payment and to avoid the need to carry cash. Hence letters of credit and bills of exchange came into use in the Middle Ages and are still in extensive use today

What is Modern Trade Finance
So what does trade finance mean? It refers to various types of facilities that allow businesses to fund their trade and stock. It is front end financing and can include:

• Loans
• Paying Suppliers Direct
• Letters of Credit

The financing is bespoke to the individual production, delivery and payment cycle of each trade – it can be for one off deals or on a revolving basis
In its simplest form an exporter wishes an importer to pay in advance or prepay for goods shipped. The importer will naturally want to reduce their own risk by getting the exporter to confirm that the goods have been shipped. As a rule the importer’s bank will assist this by providing the exporter (or the exporters bank) with a letter of credit. The letter of credit provides for payment for the goods upon presentation of certain documents such as a bill of lading.

There are a variety of descriptions for Trade Finance:

• The one we generally use is Transaction Finance
• Transaction finance allows the client to fund a committed order from their customer where current working capital resources (cash, bank finance and supplier credit) are insufficient
• It is sometimes referred to as procurement finance, order finance or supply chain finance
• Trade finance sits alongside and complements traditional forms of bank finance

Trade Finance is NOT

• It is not factoring, although assignment of debt makes it work
• It is not an overdraft as the financier buys the goods and sells them to the Client
• It is not based on the balance sheet strength of the Client; it is based on the strength of the Buyer

Key Features of a Trade Finance Transaction

• Must be a ‘closed’ transaction
• End customer must be credit insurable or provide an acceptable bank guarantee/Letter of Credit
• Goods can be imported, exported or sold in country
• Typically a 60-90 day cycle
• Normal size of a trade finance facility is from £100k to £3m
• Trading margin is normally has to be sufficient to support the transaction so good margins are essential
• Qualifying goods include can be capital goods, food related commodities and consumer goods, generally with no significant manufacturing or added value to the goods

Model followed by recommeded funders

• Traditional merchant banking model were they are able to structure transactions in an innovative and flexible way
• Highly experienced s[ecialist teams with extensive knowledge of international trade and finance
• Transactions are funded through dedicated bank lines or special facilities for large transactions
• Over-arching credit insurance policies are often in situ
• Full package of security (mix of goods, debentures and personal guarantees)
• Transactions structured to reflect a trading model

Image courtesy of  samuiblue / FreeDigitalPhotos.net