Is a lack of working capital making your business stagnate?
Maybe you understand that you need extra funding to grow, but you’ve exhausted all of the traditional funding options. Perhaps you’re confident that your business will continue to flourish based on past performance, but you’re not sure how to best fund new opportunities. And you’ve borrowed all you can from your bank, based on your personal assets. So where do you turn?
That’s where trade finance can help. It acts as a revolving business line of credit that gives you the working capital you need to fund your business growth. But what are the pros and cons? And how do you know whether this type of funding is right for your business?
Let’s dive into the advantages and disadvantages of trade finance.
First, what is trade finance?
Trade finance is a well-established business funding solution, used in 80-90% of trade worldwide. Think of it as a business ‘line of credit’ funding facility.
This kind of financing gives your business quick access to funds by introducing a financial partner into your supply chain. The high-level process is really simple:
- Your business purchases goods from your supplier, either in Australia or overseas.
- Your financier lends you the money to pay that supplier immediately.
- You then repay your financier with extended credit terms.
Trade finance funding helps to bridge the gap between paying for your goods and recouping your money when you sell them to customers. In short, it gives you the working capital to keep your business running while you wait for your goods to arrive and commence the sales distribution process.
What are the benefits of trade finance?
Businesses use trade finance to fund their business growth for many reasons – let’s examine the top four.
1. Control your working capital
Are there advantages to a business line of credit vs a traditional loan? Definitely!
Traditional financial institutions usually demand asset security before they’ll lend you money. So if you’re short on personal/directot’s assets, have maxed out your borrowing limit or don’t want to use your personal assets as collateral to begin with, your business can stagnate.
On the other hand, trade financiers often lend based on the strength of your business’ balance sheet and the risk of the supply chain transaction/s, not on your personal assets. They examine your overall business and transaction values to determine your credit limit. That makes it easier to grow and scale your business as your sales increase. As your transaction values and profitability grow, so too can your funding limit.
This benefit is especially important given recent, COVID-induced global supply chain disruptions, wherein we have seen an increase in the average time debtors take to pay, and international suppliers requiring upfront deposits. These pressures widen your funding gap.
You can close this gap and provide your business with a cash flow advantage by extending your payables by up to 120 days with Octet’s Trade Finance facility.
With our intelligent Trade Finance solution, we pay 100% of supplier invoice values, including any upfront deposit requirement. Together with interest free terms of up to 60 days, you’ve got a flexible and powerful financing tool for your business.
2. Flexibility with global transactions
International trade is complex at the best of times, so anything that makes the process smoother has to be good for your business. Using a trade finance platform makes it easy to pay suppliers in other countries and currencies.
For example, our supply chain platform platform gives you single-click payment across 68 countries in your choice of up to 15 currencies, which greatly reduces costly bank FX conversion fees and margins. Or you can bring your own third party forward exchange contract to the transaction via the platform too. In just one click, you can authorise the payment, knowing that the FX is handled quickly and easily in a single, hassle-free step.
3. Early repayment discounts
Using a trade finance facility makes your cash available shortly after you receive your supplier’s invoice. This enables you to take advantage of any early settlement discounts they may offer (or you’re able to negotiate), which can ultimately save you money.
With Octet’s Trade Finance solution, you can pay both international and domestic suppliers. And, for those domestic suppliers, this can be related to invoices for goods or services. This flexibility allows you to use the funding and seek early payment discounts for a wider scope of supplier types and transactions than other funding options may allow.
4. Reduce global trading risk
Trading internationally always comes with an element of risk. If you’re an importer, there’s the risk that your goods won’t arrive. As an exporter, you risk not being paid in a timely fashion once you’ve sent the shipment.
An intelligent solution like our Trade Finance facility makes it easier and safer to trade, regardless of which side of the transaction you’re on. That’s because both the buyer and supplier are registered and linked to one another on the Octet Supply Chain Platform.
The platform’s embedded claim and authorisation process also enables seamless communication between both parties. This ensures transparency and nullifies any payment dispute risk.
What about the disadvantages?
As with any financial decision, it’s essential to do your homework before signing up to a trade finance facility. Always investigate whether a given company and product is suitable for your business.
The top four factors to consider when you’re researching trade finance facilities are:
1. Eligibility
Not all businesses (pending their size, industry and specific requirements) are eligible for trade finance funding. Do your research to find a solution that will work with your business.
As an example, our Trade Finance soluition is open to Australian businesses that have:
- at least $3 million turnover
- been profitable for at least 2 of the last 3 financial reporting periods
- a positive balance sheet net worth
- up to date ATO payments
- current management and financial accounts
2. Costs
As with any financing solution, there’s a cost to using trade finance. That means you need to understand your profit margins and expenses so you can build the cost into your supply chain.
That way, the facility fees just becomes a normal cost of doing business, instead of being an added burden to your bottom line.
3. Product suitability
Most financiers offer a range of products, but not all products will be suitable for your business. Do your research and seek advice on which product is best for you in your current circumstances.
In addition to our Trade Finance product, we also offer Debtor Finance, Supply Chain Accelerate and OctetPay. One (or all) of those products may be the best fit for your business.
In fact, by combining Debtor Finance and Trade Finance facilities on our Supply Chain Platform, we can give your business an integrated funding package. Incorporating both facilities gives you a ‘back to back’ financing solution featuring:
- A business line of credit to pay suppliers, with extended repayment terms to Octet (Trade Finance)
- A drawable funding source leveraged against your receivables (Debtor Finance).
This ‘back to back’ financing solution can simplify those periods of rapid growth, especially when you win new projects or contracts with initial expenditure requirements. With this solution, you can leverage the increased sales revenue and mobilise that cash flow to close the funding gap.
4. Clear obligations
All financial products can appear complicated when you start out, but they should have clear terms that they require both parties to follow.
Make sure you understand any obligations that come with the funding facility. If you’re unsure of anything, get your financier to explain exactly what you need to do to fulfil your obligations for their product.
Discover whether Trade Finance is right for you
As with any business financing solution, there are pros and cons to using trade finance funding for your business. To check whether our Trade Finance facility is right for you, ask us to assess your business and help you make an informed decision.
Get in touch today.
