If your business relies on trading, it's likely that you will have experienced issues with cash flow. Trade finance offers stability and support to businesses looking to trade domestically or overseas.
Find out how trade finance works, the benefits and drawbacks, and compare your trade finance options below.
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Updated December 6th, 2019
What is trade finance?
Trade finance includes a range of services offered by a bank or credit union to people and businesses who engage in international and domestic trading. This includes transactional services, financial advice and technology, risk management services and other financing solutions.
How does trade finance work?
As domestic and international trade can be volatile, it is very common for businesses to use trade finance options to improve their operations. Trade finance helps importing and exporting businesses better manage any cash flow issues that come about due to changing market conditions and foreign exchange rates. It also offers more flexible terms compared to other finance options.
However, trade finance also covers a range of services beyond business finance. Banks and credit unions that offer trade finance services usually have a range of options available to you, and you can choose the products that best meet your business needs. Some of these services may include transactional technologies, research and analytics, trade finance facilities and financial advice.
What types of trade finance are there?
- Invoice financing. If you're waiting on customers or trading partners to pay outstanding invoices, you can choose to have them financed and receive most of the value of the invoice upfront.
- 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 from one bank weigh 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's 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.
- Limited financing. As with other forms of business finance, trade finance may be limited to the size of your receivables.
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 and look for 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.