+44 (0)800 612 7049

20th April 2021

+44 (0)800 612 7049

Transactional “Whole Cycle” Trade Finance

Transactional “Whole Cycle” Trade Finance

 

The funding of “cross border” trade by third parties has been around since Egyptian and Roman times and has been used in the UK from the Elizabethan Tudor age until the present day. Arrangements have evolved into what is now available for 21st Century business owners whether it is to fund a large one-off order, a series of orders or just regular ongoing trading – that is buying goods from one country to be sold to a customer in another – although as well as Importing & Exporting the concept can equally be used to buy from a supplier and sell to customer who are both in the UK.

The good news for business owners is that funding can be made available for this type of Trading whether you are just setting up your business and wish to finance that very first transaction or are a long established multi-million turnover organisation seeking obtain extra funding lines to support growth. Trade Finance is also sometimes called Purchase Order Finance or Supply Chain Finance

How does the system work? Well firstly it’s very much about the transaction. So, a potential Trade Finance client needs to have a confirmed Purchase Order from a creditworthy end buyer (the customer). The funder will look at the transaction and once approved will be able to pay the original supplier on the client’s behalf, usually when the goods are ready to be shipped or sometimes on arrival in the UK. If the goods are coming to the UK the arrangement can optionally include the funder paying the Freight, VAT & Duty on the client’s behalf when they arrive. The funder is repaid when the goods are delivered to the end buyer (the customer) and a sales invoice is raised and sold (called assignment) to the funder. When the buyer (the customer) settles the invoice say 30 or 60 days after delivery the funder deducts the advances already made plus their fee and the client gets their profit on the deal. This is a very simple overview as these arrangements can be bespoke in many ways for each client or indeed for each transaction. Remember that whilst it’s a great way to import goods to the UK is also works where both the supplier and the customer are in different countries and the goods never actually enter the UK.

Things to consider:

  • The funder will wish to know that your end buyer (customer) has credit rating to match the value of the order they are placing. Sometimes the funder will be able to Credit Insure the customer using their own policy (or the client’s).
  • The funder will wish to understand who the originating supplier is, and if the client regularly buys from them and that they can be considered as a reliable source of goods.
  • Depending on the goods, who the supplier is and perhaps the value of the transaction it may well be a requirement to have the goods inspected at the Supplier’s Factory – although many importers/overseas traders do this as a matter of course and have established local Quality Control arrangements in place.
  • If the Supplier requires a deposit when the order is placed some funders will prefer the client to find this cash from their own resources whilst others may be willing to advance money for deposits. It will depend a great deal on the nature of the transaction, including trading history, the product and perhaps the margin between the buying and selling price.
  • Usually, this arrangement is for finished goods (or nearly finished goods that maybe need some final low-cost processing – eg local packing or labelling) that can be delivered easily and quickly to the end buyer (the customer) without long delay. Sometimes it is possible to finance the purchase of major or key components for quick final assembly by the client.
  • What is important is that the client needs to have good paperwork skills or find someone who has, to make sure they can support the transaction all the way through from order to final payment.
  • Ideally the maximum advance that a funder will make (including if required Freight, Vat and Duty) should not exceed 80% of the end gross sales invoice value – ideally a little less. However, if the margin on a transaction is lower it may be that the funder will contribute the major portion of the buying costs with the client also contributing a smaller amount to make the deal work.

This type of arrangement is an excellent method of providing business owners with almost unlimited funding to support forward orders with the focus being on the transactions not on historic information and balance sheet assessment. Growth Finance full appreciate all aspects of these facilities and can guide you through the process of finding the best way to fund your trading going forward.

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