Trade finance for importers
As an established business that is currently experiencing expansion and a large growth period, having customers place large orders can be both a blessing and a curse. On the one hand, receiving a large new order is exactly the move your business wants to be making; it’s the kind of growth that you’re striving toward. On the other hand, spare working capital during periods of high growth is usually scarce, and these kinds of cash flow problems can lead to your business being unable to deliver. This issue is only compounded by the inflexibility of traditional finance providers, specifically regarding trading history, collateral and invoice size.
An alternative is trade finance. This may be a term you’re familiar with, and a type of finance you’ve heard other businesses using but have never considered yourself. You may know how it works, and if so, this article will only serve to refresh that knowledge. If you haven’t heard of it, then it will strive to provide you an alternate form of finance when you need it.
What is trade finance?
Trade finance (also called purchase order finance) is the process of obtaining finance to pay your supplier based on a purchase order. In other words, it allows you to receive financing to fulfil an order prior to actually invoicing your customer. In its simplest form, an exporter asks an importer to prepay for goods shipped, however, this often requires a line of credit and other documentation from both the exporter and importer.
How does trade finance work?
A company offering trade finance can do so by using the purchase order as collateral. It works in the following way with Timelio.
1. Your customer places a large order with you.
2. Upload the purchase order and supporting documentation to the Timelio platform.
3. Timelio advances funds for payment to your supplier.
4. Your supplier manufactures and ships the completed order for delivery to your customer.
5. Your customer pays the invoice into an account nominated by Timelio.
6. Timelio forwards to you any additional funds received from the invoice payment.
This differs from traditional invoice finance and factoring as it does not require you to have invoiced the client at the time of financing. The ability for trade finance to be used for international payments is also a point of distinction from many finance providers (Timelio offers invoice finance on international invoices as well).
Are there any trade finance restrictions?
Trade finance is designed for wholesalers who do not manufacture or modify their products but purchase finished goods only. It also requires your end customer to have a good credit record as they will settle the invoice. The other key restriction worth noting is that funding a purchase order is conditional upon that purchase order being non-cancellable.
Trade finance is a good option for you if:
- Your company does not manufacture the product and sells finished goods only
- Your purchase orders and non-cancellable with no consignment or guaranteed sale terms
- Your customers are large corporations or government entities
- Your suppliers have a good track record of producing and shipping goods to you in a timely fashion and without issue, and are in good financial standing
If you are growing and expanding the business and this is causing a cash flow squeeze, contact us and speak to the team at Timelio about whether Trade Finance is the right fit for you.