Trade Finance - What is it?

Trade Finance is a generic term for the provision of finance in order to enable goods to be purchased in order to satisfy an order. Finance is provided by the trade financier to bridge the funding gap between purchase and sale. There are effectively two types of trade finance - Purchase Finance and Letters of Credit

What is purchase finance?

This is short term funding against a specific order, it is usually available for:

• Importers / traders looking to source and supply goods within a short time period
• Finished, identifiable goods which are non perishable
• Businesses with experience in their trade
• Predominantly for goods with high gross profit margins

What are the advantages?

The Advantages of Trade Finance & Purchase Finance is 100% finance (plus duty and VAT) can be provided The trade financier relies on the strength of the transaction for security It doesn't affect existing funding lines.

• Example - A machinery distributor has agreed to sell a machine to a UK customer. The machine is sourced in Europe and the supplier will only release the machine to the distributor upon receipt of cleared funds. The customer is financing the purchase with HP, these funds will not be released until the machine is in the UK. Typically we have a 4 to 6 week funding requirement. The trade financier will fund 100% of the cost (plus duty and VAT) to obtain legal title to the machine. They will then arrange for payment from the end customer (or their funders). Once paid, the trade financier will pay the distributor his margin, less fees of course!

What are letters of credit?

Letters of Credit are used to guarantee payment to the supplier in order to obtain the release of goods. They are available to importers and wholesalers that satisfy the following criteria: Where there is a written purchase order for the goods The purchaser can be underwritten, or credit insurance is available Finished, identifiable goods which are non perishable Businesses with experience in their trade Predominantly for goods with high gross profit margins

What are the advantages?

The Advantages of Letters Of Credit is The forward order book can be turned into cash, rather than miss an opportunity 100% finance (plus duty and VAT) can be provided The trade financier relies on the strength of the transaction, the order and the quality of the ultimate purchaser The letters of credit do not affect existing funding lines.

• Example - An importer of seasonal goods wants to increase stock levels ahead of the busy season to satisfy written orders from UK retailers. The overseas supplier requires payment by letter of credit to raise some finance and be assured that full payment will be made upon presentation of documents. Typically, the UK bank will take the value of any letters of credit from the existing finance lines already in place. As they will not recognise any security value in the transaction, the bank will not help. However, the trade financier will provide a Letter of Credit to the exporter for 100% of the cost (plus duty and VAT). The trade financier will then obtain payment from the customer. Once paid, the trade financier will pay the distributor his margin, again, less fees of course!

So in summary...