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Markets across the globe are becoming more accessible and cross-border transaction is now part of everyday life for many SMEs.
This has led to trade finance becoming an increasingly important business tool, but one that is often widely misunderstood and thought of as over-complicated. It doesn't have to be complicated – trade finance is just another way to pay for goods before the buyer receives them.
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The jargon and acronyms associated with cross-border transactions may be to blame for the over-complicated misconception – terms such as ‘LC’, ‘FOB’, ‘CIF’, ‘bill of lading’, ‘airway bill’ and ‘tenor’ are thrown around and can be confusing. To help brokers and others understand the terms that are used in trade finance, Scottish Pacific Tradeline has compiled this handy guide.
It's worth clearing this confusion, because when SMEs turn to their trusted advisers and ask for financial solutions, brokers will need to understand what trade finance offers so they can give clear guidance.
1. Trade finance supports growth
Sourcing goods from overseas as opposed to domestic suppliers can create new opportunities and often means significantly higher profit margins. The downside is that importing generally means longer lead and delivery times, and accordingly, cash flow is ‘locked up’ for longer periods. Trade finance can be integral to funding growth by ensuring a regular cash flow and access to goods.
2. Understand the terms
Payment terms to suppliers can vary widely depending on when the transfer of title occurs and the mode of transportation associated with the sale of those goods. Accordingly, the trade finance provider will need to know the supplier’s payment terms and when the goods are to be landed and converted into cash. Invoices for imported goods include an ‘incoterm’ which determines when the client is responsible for the goods. Payment terms are generally linked to the incoterm.
3. Letters of Credit – still the safest option
An LC is a binding document issued by a bank that effectively guarantees a buyer's obligation to pay, subject to the documented terms of the transaction being adhered to by both sides.
4. All trade finance providers are not the same
Trade finance facilities are often provided by banks and secured by hard assets. However, one size does not necessarily fit all. There are specialist providers who can often tailor a facility to meet a specific need or provide facilities more quickly when speed to market is important. Specialists such as Scottish Pacific can provide facilities in conjunction with debtor finance or purely standalone, and in many cases alongside existing bank facilities.
5. Shop around - not all providers require a real estate mortgage
As with other bank-provided debt facilities, SMEs are very often required to provide real estate mortgages in support of trade finance facilities. For growing businesses, this is not always an option, so let your clients know there are alternatives.
6. Trade finance can be used for domestic purchases
Trade finance is generally associated with the purchase of goods from overseas; however, it can be used to acquire goods domestically. Many SMEs are not aware of this.
7. Combine with equipment finance to pay for imported capital goods
Trade finance can also be used to pay overseas suppliers for goods that may be the subject of an equipment finance transaction once the goods arrive in Australia.
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