A trade finance service can offer you peace of mind when you’re trading overseas.
Trading is no easy business. It involves complicated analysis of market conditions, a close monitoring of cultural and commercial situations, and a reliance on fluctuating exchange rates. So when it comes to the actual transaction, you want to make sure you’re using a service that you can rely on. This article will take you through the features of trade finance, how to compare a bank’s trade finance offerings, and how to find the best service for you.
What is trade finance?
Trade finance is a service offered by a bank or credit union for people and businesses who engage in international and domestic trading. They offer transactional services, technology to manage finance, financial advice, risk management services and financing solutions.
- Borrow up to $100,000
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- Sole traders, partnerships and companies can apply
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NAB QuickBiz Loan Offer
The NAB QuickBiz Loan allows you to borrow up to $100,000 for your business needs. The loan is available for new or existing business needs and features no upfront fee and tax deductible interest repayments. Link your accounting software directly into the application.
- Interest rate from: 12.95% p.a.
- Interest rate type: Fixed
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- Minimum loan amount: $5,000
- Maximum loan amount: $100,000
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How does trade finance work?
As domestic and international trade is a volatile marketplace, its quite common for businesses to use finance for trading. There is significant fluctuations in cash flow for these businesses, and there is little certainty with market conditions and foreign exchange rates, so trade finance comes with more flexible terms and amounts to other financing solutions.
Trade finance, though, is not limited to financing. To engage in trade, you will need to use the services of a financing institution, but the level and type of services you use will be up to you. Banks and credit unions who offer trade finance services usually have a range of options available to you, and you are able to choose the products that will meet your business needs. Some of these services may include transactional technologies, research and analytics, trade finance facilities, and also, advice.
What are the types of trade finance?
- Foreign exchange. This includes services for transactions, forwards and options that can help protect your business against unfavourable market changes, while also taking advantage of favourable currency movements.
- Domestic trade services. This type of trade finance can fund domestic suppliers and support trading cycles within Australia.
- Export services. Exporters may require documentary collections, letters of credit, collection negotiations, working capital guarantees, and financing solutions both pre- and post-shipping.
- Import services. Businesses involved in importing may take advantage of documentary letters of credit, documentary collections and trade finance.
- Cash flow services. These services include the management of foreign currency accounts, the facilitation of foreign currency overdrafts and telegraphic transfers
How do I compare products that allow trade finance?
- Available currencies. Most Australian banks will offer trade finance in Australian dollars, although some will also have options for other currencies.
- Interest rate. You should check how often the interest will be calculated, which will ideally be daily, and you should also see how the interest rates for one bank weighs up against competitors.
- Repayments. The timing of your repayments will work differently between banks, for instance, some may require you to pay at full maturity. This timing may impact your cash flow, so keep this in mind. You may want to choose a bank that offers a repayment structure that won’t have a negative impact on your business’ financials.
- Financing terms. The financing terms for pre- and post-shipment finance will differ between lenders, and pre-shipment finance generally has shorter terms. Check the terms available before you apply to see if they will work for your business.
The benefits and drawbacks of trade finance
- Security. Some services allow you to protect your business against unfavourable foreign currency movements.
- Options. Banks who offer trade finance services have a range of options available for you to choose from, some of which you may not have even known were available.
- Expertise. You can take advantage of the advice and expertise offered by the bank you’re working with.
- Cost. As with other financing solutions, trade finance comes with a cost. Make sure you factor this cost into your business financials.
Things to watch out for
As with any financing, there are risks involved. You should always read the fine print before applying for any trade finance products to see any restrictions, especially as many of these products will need to be applicable internationally. For instance, some banks will only arrange spot and forward foreign exchange purchases for approved clients, so this is something that you would need to consider before you apply.