Trade is a fundamental part of the South African economy, e.g. the import of fuel. Trade finance is a solution designed specifically to help your business finance the trade of goods and services (buying or selling). It is a cash flow alleviation tool to make sure the cogs of your business keep on turning.Banks and other financial institutions provide various trade finance opportunities to help with these sales and purchases because delivering specific products or services (or purchasing them) can be expensive and carry risks for both parties. These solutions are built with the intention of assisting the trade of goods and materials – this is often a very necessary step for businesses where there is a lag between paying suppliers and receiving payments. This cash flow mismatch is where businesses are unable to meet their financial obligations. Trade finance provides much-needed support for physical commodity transactions. Although structured, this finance type is usually customised to suit the needs of each client.
There is one significant difference between the two – location. International trade finance is mostly the same as domestic trade finance, however, it only deals with international suppliers. Domestic trade finance will be for transactions in the same country, whereas international trade finance will be for transactions between two countries e.g. South Africa and China. It’s important to know the difference between the two as some suppliers only deal with one or the other. Both finance types are quite similar in structure – each with a buyer and seller. The seller is the exporter, who will require payment for their goods. The buyer is the importer, who will be procuring the goods to either resell or use for manufacturing. So where does trade finance come in? This business finance solution will settle the amount owed to the seller on behalf of the buyer. The buyer benefits from extended repayment terms while the seller benefits from immediate payment.
If you feel you are facing financial limitations, then Trade Finance can help you get funds to pay exporters. This business loan is designed specifically to help the trade industry.
In South Africa, we predominantly rely on trade to support our economy. So trade finance is a great cash flow alleviation tool to make sure the cogs of your business keep on turning.
Uncertain what you would need trade finance for? If you’re selling or exporting a product, in an ideal situation the buyer would prepay before receiving the goods. However, this isn’t always the case for most buyers, and thus the need for trade finance to facilitate this.
Here are a couple of reasons why buyers wouldn’t be able to pay upfront:
Cash flow issues
When an importer requires goods, but can’t pay upfront for them, they would make use of a trade financing lender. This type of financing would allow the importer to go ahead with transactions and pay the exporter.
Risk
A significant reason for the need for trade finance is the risk involved with paying for goods before receiving them. Especially if you’ve paid quite a large sum of money that could prohibit you from making financial decisions in other aspects of the business. Another concern could be paying for goods, and there being defects, issues, or quality checks needed to be done. Therefore, the funding serves as a third-party risk-management tool for both parties.
Even with the assistance of banks and other financial institutions, there are some required documents which can help facilitate and streamline funding for imports and exports.
Like any other letter of credit for a traditional loan, this is essentially a guarantee from the buyer’s bank, confirming that if all the documents for the sale and shipping/logistics are presented, the buyer’s bank will make payment to the seller.This allows both the buyer and seller of the transaction to follow the agreement and provides security for both parties too.
This form of guarantee will kick into place even if the buyer or seller fails to fulfil their agreement terms or is unable to provide or pay for the product or service outlined. The guarantor bank will then pay out the other party.These are often utilised when notable risk is in place, and the bank guarantee enables companies to purchase goods from suppliers which, without it, could not happen due to the uncertainty of payment.
While the trade finance industry is in place to help promote and facilitate trade opportunities between importers and exporters, there are a few options available based on what type of risk mitigation or financial help you require:
This is a security measure whereby the banks or financial providers between the buyer and seller would coordinate with one another. The buyer can receive goods that they’ve ordered, but the seller’s bank will withhold all the important documentation (bill of lading, certificate of origin, etc) until payment is made. The documentation (which the buyer needs) is almost a form of collateral for the transaction.
If even greater security is needed for an import/export transaction, trade credit insurance is often used. It’s essentially an insurance policy for the sale of the goods, therefore protecting the seller for any problems that may arise, such as the bankruptcy or non-payment of the buyer.
If a seller/exporter wants to minimise all their risk, and doesn’t mind incurring a cost as a result, full third-party financing support can be used. Known as forfaiting, this is when a financing entity can cover all the costs and risks for the transaction but charge a rate or demand a margin on what the transaction is valued at. While this can be costly, it often provides either the buyer or seller peace of mind and security on the transaction.
If a company requires cash and cannot wait for buyers to pay, they could look to factoring (sometimes called debtor financing). This is where a business will sell the value of the payments due to them at a discounted rate to a bank or financial institution. The bank will then provide cash immediately and resolve the transactions themselves to make a profit.
Similar to Factoring, but different in its period and nature, Forfaiting is the purchase of an exporter's receivables – the amount that the importer owes the exporter – and rights to trade at a discount by paying cash. This is usually done for capital goods and for more long-term trade deals.
Your interest rate will vary from lender to lender and is generally case specific because it depends on factors surrounding the trade that you want to finance. In some instances, the cost of finance will be calculated based on a profit-share method. This means that the lender will consider your profit-margin, your trade turnaround time, and what the risk of the deal is – they will then use this information to determine the finance amount.
Profit margins should ideally be around 15%, and an estimated monthly interest rate ranges from 3-5% (again depending on the lender).
Generally speaking, the repayment terms for trade finance are 3 months, however, they can range to longer terms based on the specific case. The terms of the loan are often determined by the trade cycle of your business, and trade cycles are usually around 90 days.
Because of the fact that your repayment is linked to how much revenue you earn, there is generally no fixed repayment period on a MCA.
If your revenue spikes, you repay the loan faster.
A business is purchasing raw materials or stock from a supplier and requires cash flow to keep the business going while meeting the supplier’s payment terms. In some cases, an international trade finance solution will settle the supplier (ie. The lender will pay the amount owed to the supplier) so that the business can benefit from extended payment terms to ensure sufficient cash flow in the business. The stock that the business needs to finance costs R900 000.
They are relatively new business:
They apply through FundingHub and find a few lenders in South Africa who can assist them, but the best offer is from a lender who can offer a term of 3 months and a fixed monthly interest rate of 4%.
* Figures are for example purposes only, and may vary from business to business.
Anything really. Trade finance entails the supplier being paid directly by the lender, and there are often very few limitations on what the product is.
Our Trade Funding application process only takes a few minutes to complete, and we want to make sure we get the right information so you can get the right offer for your needs.
Here's how it works.
One application form will mean you find trade finance offers from reputable trade financiers. It's fast free and fully online.
If there is any supporting info or documents required, you can provide them during the application - or at a later stage too.
We will present you with a list of all your loan offers. This takes seconds to fetch, and the list will be continually updated as you add more information to your profile.
All the specifics around, pricing, fee's, speed of funds and the different lenders is laid out for you. If you have questions, we've got an independent analyst who can help you choose the right offer.
With your permission, your details will be shared with the lender who will disburse the loan to you. They'll collect your bank details, approve your offer and pay you out. We'll be here if you need any independent advice along the way.
.png)