Touch Financial Consultant Katerina Nicolaou explains the benefits of trade finance for businesses in the run-up to the Christmas retail period.
What is trade finance and who is eligible to receive it?
Trade finance is a funding solution provided to UK companies that purchase and sell finished goods or raw materials to other businesses based either in the UK or overseas.
Can you explain how trade finance works?
Once confirmed orders are received from your debtors (who can be based in the UK or overseas), the goods are sourced from your supplier (who can also be based in the UK or abroad). A letter of credit is raised by your business bank, guaranteeing payment to your supplier for the goods ordered. Once your supplier has received this guarantee, the goods are normally loaded with a bill of lading issued. The finance provider will advance the cash owed to the supplier in full, once the relevant documentation has been received.
What impact does this have on the businesses’ cash flow?
Orders can put cash flow under pressure, especially if businesses are required to pay their suppliers in advance, whether in part or in full, for goods on completion of works or on delivery to docks ready for shipment. At this point, businesses may still be waiting on payment from debtors.
How can businesses bridge the funding gap?
The amount you owe to the finance provider for fronting the payment on your behalf is known as your trade balance. At this point, you may still be owed payment from your customers. You can bridge this funding gap by opting for invoice finance.
The finance provider will make payment in full to your supplier when the goods have been loaded and it has received the agreed documentation (the bill of lading) from your supplier. This will allow you to fulfil potential orders and increase company revenue.
Is it possible to opt for trade finance without invoice finance?
Yes, if your business is confident that the purchase of goods from suppliers won’t have an adverse effect on its cash flow. If we’re talking about businesses that import goods then this option is usually restricted to robust businesses with an import balance of £500,000 or more.
Why is this especially important mid-year?
UK businesses typically start preparing for Christmas trade in the summer. This isn’t just limited to Christmas-related goods, but also open to goods on sale during the run-up to the Christmas period. Signing up for trade finance and invoice finance now will cover your business’s cash flow from any outgoing cash (to suppliers) and during the wait for incoming cash (from customer payments).
Trade finance is especially beneficial for businesses that trade seasonally and receive large Christmas orders.
Thanks for the helpful run-through. Finally, is there anything a business should look for in a trade finance provider?
Look for a lender who also provides an invoice finance facility alongside your trade finance facility. This will allow businesses to repay the trade finance facility and will attract a lower interest rate. Trade finance facilities will also provide funding support for transportation costs, VAT and duty, if required.
Our team puts businesses in touch with trade and invoice finance providers who have a wealth of experience, who will help your business settle its trade balance, so that you can trade confidently in the Christmas market.
Katerina Nicolaou is a business finance consultant at Touch Financial. For more information on trade finance, invoice finance or other forms of business funding, get in touch with Kat or our other finance experts on 0845 388 9725 or via email at email@example.com. You can also request a callback by filling in a ‘Get A Quote’ form – click on the button below.