Trade finance is a specialist area of banking which helps buyers and sellers of goods and services to access higher levels of finance for trade than would be achieved through conventional lending.
It can support and de-risk funding gaps between the time exporters have to pay for their own supplies, and the time they receive their final payment for the end product.
Trade finance should not be seen as inaccessible. While your account manager at the bank may not be an expert on all available options, he or she will be able to consult a trade finance adviser. Even small firms should not be nervous about investigating the possibilities. Because it is lending against the value of an overseas order, businesses that have been turned down for loans and overdrafts may be successful in raising money with a trade facility.
Letters of credit are among the most common trade finance instruments. These address a fundamental concern of exporters that they do not want to ship their goods out without payment, while at the same time addressing the corresponding reluctance of importers to pay for goods they have not yet received.
A letter of credit (LC) is a guarantee of payment issued (for a fee) by the buyer’s bank, subject to the seller meeting agreed conditions such as supplying their goods or services to the right standard.
A credit period can be built into the LC, whereby the payment is made within 30 or 60 days of goods being shipped.
A UK bank may then confirm and then discount the LC, meaning they can provide funds in advance of receiving payment from the buyer’s bank, helping the seller with working capital.
Documentary collection is a slightly weaker but generally cheaper alternative to using letters of credit. Under this system, exporters use their UK bank to issue shipping documents to the buyer’s overseas bank, along with instructions that payment should be made before the buyer takes ownership of the goods at the docks.
While it does not guarantee your buyer will pay you, the element of formal communication between banks can reduce the risk of losses.
Trade credit insurance is an insurance policy taken out to cover the risk of non payment from an overseas buyer.
A claim can be made under the policy if for example the buyer becomes insolvent causing the exporter a loss or wasted costs; there are unacceptable delays in payment (more than six months overdue); or payment is blocked by currency controls or political unrest.
This type of cover is useful if an exporter needs to offer credit to win an order, but no letter of credit is available from the buyer. Having an invoice credit-insured can also allow banks to advance funds to an exporter, as payment risk is reduced.
Bonds are promises to pay sums of money if contractual obligations are not met, and are generally issued by the seller’s bank to the buyer’s bank for a fee. For example, a bank can issue a performance bond which gives the overseas buyer confidence that if you do not deliver your goods or services to an agreed quality (or at all), the buyer may be able to reclaim money paid in advance under the bond.
The issuing of bonds can form a crucial part of contract negotiations. Offering your customer a bond can lead to improved payment terms.
As you can see, there is a wide range of options that can help you with cash flow as you gear up to meet your export orders, while managing the risk of bad debts.
Banks and brokers can often help with trade finance, but where they cannot meet all your needs, you can talk to UK Export Finance, the UK’s export credit agency. We are tasked with bridging gaps in the trade finance market – and there is a network of export finance advisers like me who are your first point of contact.
We provide information for free, and can signpost you towards all kinds of support, not just government support.
Remember, these are just a few of your trade finance options and there is a wide range of other solutions available that can help you generate additional working capital, from a cross-section of service providers. UK Export Finance can help signpost these too, alongside all the other service providers who will form your network of export support. So, you are not alone in facing these challenges.