Here at Simply Factoring Brokers we regularly get asked about factoring and if it’s going to be profitable for a business to use in the long run. Not many people know what trade finance is, in this blog we are going to explain bit by bit what trade finance is and what it does to benefit you and your company.
If you own a company that has a supplier overseas then trade finance is something to consider. Trade Finance starts like this, you get an order from a customer for £100K worth of steel for example and from this you need to order the raw material from your supplier based in China, America, Germany anywhere really. Once you have placed your order with your supplier the Trade Finance would pay your supplier for you, the goods would then get shipped to you and delivered to the customer. This can take between 8 – 12 weeks in some cases from initial order to delivery to the customer and from there you generally have to wait 30-60-90 days for payment. So if you had a Trade Finance facility what generally happens is it will be linked to a factoring facility and when you deliver the goods to your customer your factoring facility would settle your trade finance, you would receive the remaining funds from the invoice value up to 80-90%. Once your customer pays, you would then receive the remaining 10-20% of the invoice minus 2-3% all in for the above service. In a nutshell this is how any trade finance facility works from top to bottom.
The reason why this product is rising in the market is because businesses who receive heavy costs upfront for materials, staff, delivery costs etc are now also faced with hefty payment terms from their customers. So you are having to wait for example 12 weeks for the materials to be shipped from your supplier to you and then once delivered to the customer they will then pay you in 30-60-90 days. Meanwhile your money is still tied up in the raw material so it is difficult to take on more contracts and win more business until you get paid by your customer, this can usually up to 5/ 6 months in some cases.
Trade Finance will be tied into a Factoring facility which alleviates the cashflow pressures of businesses in these scenarios and more often than not giving a business a faster opportunity to grow and expand. You can then take more orders and place more business and not lay out a penny until your customer pays. For this reason Trade Finance is becoming a more popular option for the modern business. We have also listed a few more benefits below;
THE BENEFITS OF TRADE FINANCE
- Reduces the payment “gap” between purchase and sale of the goods
- Reduces trading, currency and administrative risks and eases the potential “hassles” of trading internationally
- Support with importation paperwork and administration, Letters of Credit for imports
- The ability to increase your turnover without jeopardising your cash flow
As you can tell from above Trade Finance is becoming more and more popular but even by today’s standards this product still isn’t very well known. So if you have come across this blog then please feel free to contact us and see how we can help and save you money rather than going to funders direct.