Specialist Funding products - Trade finance

Following on from my tongue-in-cheek review of business funding products, my aim now is to flesh out some of the less understood products; in this case Trade Finance.

If you ask most accountants, bank managers or business advisors about trade finance, in 80% of cases you will be met with one of 2 responses: either a blank look, or something along the lines of 'Oh yes, thats for stocks and things' - test me on that one!

So to dispel the myth (and alienate half of my readers): Trade finance is not stock finance. Stock finance per se does not exist (but if it did, I'd be very, very wealthy - at least for a short time).

Having established what it isn't - what is it? and who can use it?

Trade Finance is a specialised funding product which is probably appropriate for about 10% of businesses in the UK - and for those companies it really can be the difference between run away success and limping along from day to day.

The vital components to create a trade finance deal are:

1. Finished goods (or simple process required to finish)
2  Confirmed order or clear route to sale.
3. Credit insurance on one of the key parties.

So in the most simplistic of scenarios  XYZ inports supplies SpaceHoppers to a varietly of local stores. They are sourced in China & shipped direct at a gross margin of 30%

They are approached by a major multiple who wants SpaceHoppers supplied in bulk, potentially trebbling their turnover. XYZ approach their bank for an overdraft to fund this transaction for 60 days; unsurprisingly the bank decline as there is no tangible security in the UK.

 Enter Trade Finance. The trade financier effectively takes on the transaction on XYZ's behalf buying SpaceHoppers and delivering for a fixed fee.

Result:

The customer fulfills his order and is now established as a regular supplier to that multiple (and a valued customer of the Chinese manufacturer)

The multiple has their stock in good time and on standard terms.

The bank have a secure customer without having taken any risk (The trade financier is independent so the banking relationship remains intact).

That is, of course, a perfect world scenario, there are often a lot of twists and turns and varients on how the product is offered.

Traditionally, this is an area where banks would have taken a punt on overdraft funding (often dressed up as trade finance), but that is now extremely unlikely - in fact it would probably be an instant-dismissal offence for most managers to take on this type of facility.

In a nutshell, trade finance is about getting the deal done; in the example cited, the customer had a clear choice - do the deal with trade finance or lose the customer.

Those who can use it really need to be aware of this product.