Trade finance helps to finance the costs of trade, usually the costs of importing or exporting goods and the costs of getting those goods to the end customer. Bottom line, business growth can be difficult to manage. As you gain customers, particularly big buyers and retailers, you may find yourself scrambling to maintain sufficient cash flow to keep up with and fulfill larger orders while maintaining standard operational overhead.
The Supply Chain Cycle Cash Crunch: The cash crunch wholesalers often experience is usually the result of the supply chain cycle: wholesalers, particularly importers, must lay out cash or use their lines of credit to start production, which can take months. Once production is complete, wholesalers typically have to pay remaining balances for the cost of goods plus shipping, duties, and freight. Even after goods reach you, you then have to pack, sort, and ship them according to each individual customer’s preferences. And then, even after the vendor finally ships the goods to their end customer, the vendor won’t be reimbursed for payments to their suppliers until the customers pay their invoices, typically 30-90 days after delivery. All the while, the wholesaler must pay their employees, rent, office costs, and other typical operating expenses. Thus, the supply chain cycle from production to delivery leaves their funds depleted.
Traditional Loans: Many business owners are inclined to take out traditional bank loans to supplement their cash flow, but banks providing loans often have stringent requirements, inflexible terms, and take a long time to receive. At the end of the day, traditional loans can be as much of a hindrance as they are a help.
Applying for a business loan involves exorbitant amounts of paperwork and substantial time to structure and underwrite, meaning funds generally do not reach you promptly. Banks also structure loans based on your business’s credit, meaning that any history of financial difficulty will count against you. Banks also tend to be especially conscious of risk, preferring to only provide funding when assets are abundant and therefore risk is low. Yet, the most obvious drawback of these loans becomes apparent when you actually receive the loan. Your line will generally be limited, inflexible and hard to supplement with alternate financing because banks often perceive other lending arrangements as potential threats to their own position.
Trade Finance Solutions: If you need capital to fund operations quickly and could use financial and logistical assistance throughout your supply chain, trade financing may be the best option for you.
Trade financing is different from a traditional loan, because funds are advanced based on your current transactions and your customers’ credit, rather than your own credit or that of your business. Since funds you receive are against your invoices and purchase orders, the financing you receive can grow with you. You also won’t have to worry about providing years of pristine financials. Moreover, since trade finance is tailored to grow relative to sales, you will not have to apply for credit line increases when your sales increase. As your purchase orders and overall sales increase, most trade financiers will increase their lines to accommodate the growth, thereby offsetting the funding gaps that arise when you have to pay more for cost of goods, shipping, and freight.
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