Trade and supply chain finance
Establishing trade links can have a significant impact on the time, resources and cashflow of a manufacturer. Trade finance comprises a comprehensive range of financial solutions that can support a business’ international trade cycle at every stage – mitigating the risks associated with exporting, such as late payments, and ensure that it can keep running its operations smoothly and profitably.
Working capital solutions
Cashflow pressures are often their greatest when a business is expanding. When exporting, cashflow can be severely stretched as funding gaps arise between supplying goods and receiving payment. The issue can be exacerbated by strict trading conditions often found in competitive global markets. To ensure businesses don’t run out of cash when trading internationally, there are a handful of products that can be considered:
1. Export letters of credit
Letters of credit are a widely used and very effective way for a business to deal confidently with customers, secure in the knowledge that payment will be made if a transaction is carried out according to pre-agreed terms. Crucially, the letter of credit is supported by a bank guarantee of payment and are only issued if the importer is deemed ‘creditworthy’ by a bank or other financial institution.
2. Export finance / invoice financing
For an exporter, there is often a funding gap between production and payment. To help improve credit management and free up cashflow to support business growth, export finance is used to bridge the gap and comes in two forms:
- Pre-shipment finance – If a business has confirmed an order from a quality buyer and backed by a documentary credit, a bank can provide the working capital needed to produce and ship the goods, giving the exporter the reassurance of being able to take on new contracts and grow its business; and
- Post-shipment finance – Once goods have been shipped to a customer, a bank may also be able to advance payment so the business does not have to wait for payment, giving access to capital to fund further operations.
3. Supply chain finance
It can be difficult to meet the needs of both buyers, who try to extend payment terms, and as a seller, who wants to be paid as quickly as possible. Supply chain finance is a ‘win-win’ solution that can help manage the working capital requirements of both parties effectively and help ensure a long term and a financially stable relationship.
Essentially, suppliers can obtain early payment of their invoices with the buyer’s bank, giving them greater access to working capital, but at no extra cost or debt to the buyer.
Risk management solutions
When forging trade links with new markets, particularly in emerging economies, there are significant risks to exporters. Alongside the need to access local expertise and support in the target market, businesses must look to protect themselves against the non-payment of invoices.
Guarantees and bonds
Guarantees, which are also known as bonds, are vital in supporting an exporter’s ability to perform under a contract or meet payment obligations, particularly in uncertain market conditions. They may also be used to underpin any bid to gain credibility and win new business when engaging in a new relationship.
The bank takes the role of guarantor, on behalf of the exporter, and promises to pay an agreed amount of compensation to the importer if goods are not delivered according to a contract, thereby taking on the risk of the trade.
Documentary collections help a business to make and receive payments with trusted trading partners. While no bank guarantees are given of payment, it can be a more cost-effective tool than letters of credit in reducing risk and provides the exporter with high control over its position.
The documents are prepared by the exporter and passed via the respective parties’ banks to the importer once the seller is paid and provides a bill of exchange. With the documents, the buyer can secure the shipping documents necessary to receive the goods and clear them through customs.
David Richardson is Head of Manufacturing at Lloyds Bank Commercial Banking, Mid Markets.
Share this story