Explaining trade finance

Trade finance is a transaction solution that enables businesses to buy and sell goods both nationally and internationally. It offers excellent risk protection to all parties involved.

From a buying perspective the risks are that the items may not arrive in the expected timescales, or the quality may not be as expected. For the seller a major risk is with payment not being received when expected. Clearly these issues are difficult to contend with for businesses located in the same country but when this involves companies being in different countries it can become even more complicated.

By structuring a trade finance deal these risks can be mitigated. Some typical examples of trade finance include:

• Open account – ideal for trusted business relationships where upon receipt and satisfaction of goods the buyer will complete payment in full.
• Factoring – a supplier will sell the invoice to a factoring company and as soon as the equipment has been shipped an invoice will be issued and payment is received. The factoring company will then look to collect the value of the goods directly from the buyer.
• Supply chain finance – a solution which is set-up by the buyer and used to finance goods whereby terms are agreed based on upon the buyer’s credit rating and trading history.
• Payment in advance – a buyer will issue payment directly to the supplier before the goods are shipped. Generally, a buyer can use business finance sourced locally to enable them to fund the upfront purchases.
• Letters of credit – issued by the buyer’s bank, the letter will give guarantees to the seller that payment will be settled at the agreed time providing everything is as expected with the goods received.

The mitigation of risk is a huge factor in arranging trade finance however, it can also assist sellers to access business finance, enabling them to reach a wider customer base. It can be a key solution in enabling international trade opportunities, improving cash flow and helping to fulfil business growth initiatives.

If you have any questions or would like to know more about trade finance, please call us on 01993 706403 or e-mail enquiries@ngifinance.co.uk.