Just because your supplier may be on the other side of the world does not mean that it should make things difficult.
There are two misconceptions about trade finance.
It is difficult and can only be done by big companies. Wrong. Trade finance is open to every size of business and is often easier to arrange than an overdraft.
The reason why trade finance can be easier is that each transaction sits on its own. The lender can see the whole transaction and knows where repayment is coming from. This means their risk is lower and if anything goes wrong, then properly structured trade finance shows this very early. All things that lenders like.
Trade finance is only suitable for importers and exporters. Wrong. The same finance products can be used for domestic trading. Trade finance can be used to pay UK suppliers and finance domestic trading.
Next time you are thinking about cash flow or needing an overdraft then consider if there is a better method of doing this. The products and cycles used in trade finance are the same whether you are dealing with a supplier in China, Turkey, Bolton or Swansea.
Trade Finance Explained
There is no easy way of showing how trade finance works in a blog post. The diagram below shows the cash movements, what is happening at each stage and what type of trade finance is used at each stage.
I hope this shows a little about what goes on, however it may simply confuse things even further. If it does then give Lime Consultancy a bell and we will talk you through in plain English.
If you are trading domestically then simply swap the word ‘China’ for wherever your supplier may be based, UK or anywhere else.
If you are a seller (read exporter) then the same cycle applies, simply change ‘China’ for your company’s name.
I hope this blog provides some insights into how you could be financing your trade (trade finance), however if you have any comments then add them above or contact Lime Consultancy via the website.
By David Farmer