What is Trade Finance and How Can it Support My Business?
Trade Finance can seem like a complicated or overwhelming concept. With that in mind, we wanted to give a typical example scenario of where it could directly support your business.
Example Scenario of When Trade Finance Could Help
Imagine that a business is purchasing goods regularly from China on ‘Cash Against Document’ terms to the value of £100k / $137k. In turn, that business is selling these goods to its customer at a price, including VAT, of £150k monthly.
What this means is that the business is paying for their goods, whilst said goods are in transit, using its cash generated from historic sales.
The business owner is keen to increase its sales, and in turn profitability, and are talking to their customer around an increase in quantities which will result in an increase in sales. These discussions go well – to the extent that the customer places an order of £450k inclusive of VAT – an increase of £300k against their standard orders.
The business discusses this with its supplier and, whilst the supplier is able to provide the quantities in the required timescales, the payment terms of ‘Cash Against Documents’ remains the same. This means that the business will need to pay their supplier the amount of £300k / $411k which at this time they are unable to do.
The business is now in a ‘Catch 22’ situation: wanting to grow the business, a customer that has placed an order at a much higher level, and a supplier who can provide the goods – but it has insufficient cash in which to proceed.
This is where Trade Finance can help the business to unlock its cash flow. With a properly structured Trade Finance Facility, the Trade Finance provider will be able to pay the supplier the purchase price of £300k / $411k on the existing terms set out by the supplier. This means that whilst the goods are in transit to the UK, the Trade Finance provider will not require repayment until the goods have been sold, if an Invoice Finance facility has been implemented, or when the customer comes to pay.
This results in a scenario where the supplier has been paid, the customer has received their goods in line with the expectations and the business is in a great position to continue to trade at increased levels.
Why get stuck in a rut and lose out on business? Don’t have sleepless nights, get in touch with WeDo Trade Finance and we see how we can help