How Trade Finance Can Help Growing Businesses Fund New Opportunities

For many growing businesses, winning new business is an exciting opportunity. But taking on larger orders can also create a financial challenge.

Rapid expansion, seasonal demand, exceptional one-off orders and customer credit requirements can all place pressure on a company’s available financial resources.

This is where trade finance can provide an alternative way to fund business growth.

What Is Trade Finance?

Trade finance provides funding for transactions that span from the supplier of goods, or the seller, through to the final customer, or buyer.

It can support both international and domestic transactions and often involves an intermediary business, or client, that purchases goods from a manufacturer and sells them to an end customer or retailer.

In simple terms, trade finance can help a business fund the movement of goods through the supply chain before it receives payment from its customer.

How Does Trade Finance Work?

Traditional finance facilities may be based on a company’s credit history, balance sheet strength and other financial information.

However, specialist trade finance providers can use alternative finance structures for businesses that may not have the balance sheet strength normally required by traditional lenders, including start-ups and growing companies.

One approach is to use factoring or invoice discounting, where funding is provided against the company’s sales ledger or selected customer invoices.

This type of facility generally addresses the company’s cash-flow requirements after goods have been delivered and invoices have been raised.

When combined with purchase finance, funding can also be provided earlier in the transaction, helping the business finance the purchase of goods from its suppliers.

Supporting the Supply Chain

A trade financier can also act as a guarantor, undertaking that a supplier will receive payment before goods are released.

The goods can then be held at a third-party warehouse, allowing the customer to inspect the products and confirm their quality before making payment and taking delivery.

This means that trade finance can be structured to support different stages of the supply chain.

What Should You Look for in a Trade Finance Provider?

Choosing the right trade finance provider involves more than simply looking at the amount of funding available.

Here are seven questions businesses should consider.

1. Can the facility be flexible?

Ask what finance products are available and whether the facility can be adapted as your business requirements change.

A specialist provider may be able to finance different stages of the supply chain rather than providing a single type of facility.

2. Will your business be important to the provider?

Consider the size of your funding requirement compared with the provider’s other clients.

It is also important to understand how much experience the provider has in your industry, as this can influence the type of service and support you receive.

3. Will you have access to decision makers?

Find out whether you will be able to communicate directly with experienced decision makers who understand your business and international trade requirements.

4. How much funding can they provide?

Understand how the provider’s credit lines are structured and whether larger transactions require additional approval.

This can be particularly important when you need to make decisions quickly in response to a new order or business opportunity.

5. How is currency risk managed?

For businesses involved in international trade, currency exchange can have an impact on the overall cost of a transaction.

Ask how the provider manages foreign exchange and currency risk.

6. What fees will you pay?

Make sure you understand the fee structure before entering into an agreement.

Ask whether charges are based on the capital provided or end-customer sales values and whether minimum or non-utilisation fees apply.

7. What are the contract terms?

Finally, understand the length of the agreement and whether there are penalties for ending the facility early.

Clear contract terms can help you understand the financial commitment before you proceed.

Case Study: Funding Growth for a Fashion Business

A young and growing UK company with its own fashion brand needed funding to purchase stock for retail customers across the UK, USA, Europe and the Middle East.

The company also needed stock for its growing e-commerce business.

The Challenge

The company needed to purchase goods from suppliers before receiving payment from its customers.

Its European suppliers required payment before delivery, while the finished products needed to be transported to the company’s UK warehouse before being distributed to retailers or sold through its e-commerce operation.

The business therefore needed funding across several stages of the supply chain.

The Solution

Sterling Trade Finance Ltd provided a combination of:

• Selective factoring
• Supplier purchase finance
• E-commerce finance

The company’s largest customer was placed on the selective factoring facility, providing bad debt insurance cover.

Sterling purchased goods from several European suppliers to satisfy the company’s retail customer requirements.

Once the goods arrived at the UK warehouse, they were divided between stock for retailer deliveries and stock intended for online sales.

The facilities could also be used to fund associated costs such as:

• Freight
• Duty
• VAT

How the Facility Worked

The financing followed the movement of the goods through the supply chain.

European suppliers

↓

Supplier purchase finance

↓

UK warehouse

↓

Retailer deliveries + e-commerce stock

↓

Customer sales and invoices

↓

Repayment to Sterling

Sterling was repaid through sales invoices raised on the customer’s retail business and directly by the client as e-commerce stock was sold.

Supporting Business Growth

The facilities also gave the company options to fund stock for its own retail operation and concessions within major high street stores.

With a financing mechanism in place, the company was able to consider larger orders and increase its PR and marketing activity.

The funding structure also gave the owners greater confidence when considering investment opportunities generated by the company’s growth.

Key Takeaways

Trade finance can provide growing businesses with funding across different stages of the supply chain.

Depending on the structure of the transaction, it can support:

Purchase of goods
Funding supplier payments before delivery.

Invoice finance
Providing funding against eligible sales invoices.

E-commerce finance
Supporting stock intended for online sales.

Supply chain costs
Helping cover costs such as freight, duty and VAT where required.

For businesses experiencing rapid growth, seasonal demand or larger customer orders, understanding the available trade finance options can help them assess how best to fund their next stage of growth.

Looking for a trade finance solution?

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