Reduce risk and keep cash flow in your import or export business
In many ways, trade finance is just another form working capital like invoice financing, factoring or agribusiness line of credit except it’s designed specifically for businesses involved in international import and export.
A trade finance facility itself offers both a revolving line of credit for working capital purposes but it also comes with letter of credit options that allow the bank to act as a third party in your international transactions.
Around 80-90% of world trade relies on trade finance so how can you access this funding for your business?
How does the working capital component work?
Just like an overdraft facility, the trade finance is a revolving line of credit with a set limit based on your security and overall financial situation.
For an importer, you can access this facility to fund the gap between paying a supplier for goods and then actually generating a profit from selling the goods to customers or using the products for manufacturing purposes (whatever the nature of your business may be).
For an exporter, you can fund the gap between selling goods and actually receiving payment from the buyer.
Although everything in business finance is based on the strength of your situation, as a general rule:
- You can borrow up to $250,000 secured over residential or commercial property or a charge over business assets.
- Interest rate: Based on a short term cost of funds interest for AUD or major foreign currencies plus a margin.
- Repayments: Principal & Interest (P&I) only.
- Minimum loan term: 14 days.
- Maximum loan term: 180 days.
- Annual fee: Transactional fees will also apply when requesting a letter of credit.
- Overall facility: 12 months revolving but it can less for one off or customised trade contracts.
If your annual turnover is less than $5 million, we can work with a lender that can offer you a great interest rate and competitive terms.
Get in touch with one our specialist business mortgage brokers by calling 1300 889 743 or by filling in our online enquiry form and find out if you qualify for trade finance.
Do I need to provide a GSA?
Buying a commercial property generally requires you to provide a General Security Agreement (GSA).
However, you can avoid having to provide a GSA with trade finance if your loan is under $1 million.
In lieu of a GSA, trade finance applicants can provide a Guarantee and Indemnity or G&I.
This is a less formal agreement than a GSA (more of a handshake agreement) and means you have more control over how you meet your loan repayments in the event of default.
To explain, it means that the bank cannot immediately take hold of your commercial property or business assets as they can with a GSA.
Instead the handshake agreement is relying on the fact that:
- You’re in a good financial position.
- Strong equity in other properties.
- The loan is under $1 million which presents much less risk.
How does a letter of credit work?
A letter of credit (LC) or export documentary letter of credit is one of the bells and whistles that you get with a trade finance facility and the purpose of it is to provide a level of security when transacting with an overseas business.
Normally, an importer is required to prepay for goods before they’re shipped by an exporter.
This of course carries a lot of risk for the importer since there is no guarantee that they will receive the goods.
Similarly, if the exporter were to extend credit to the importer, there’s no guarantee that the exporter will receive payment.
This level of distrust is very common when business relationships are yet to be established between importer and exporter so the solution is for the respective banks of the importer and exporter to act as a third party agents in the transaction.
How does it work?
As an importer, for instance, you will instruct your bank to provide the exporter with a letter of credit that guarantees payment to the exporter once you or your bank receives documents confirming that the goods have been shipped.
In exchange for shipping the goods, the exporter will receive a bill of lading (BoL) from the carrier (a ship), which they will then provide to the importer’s bank to receive payment.
Although the bill of lading is usually adequate evidence that the shipment has been made, further evidence may be required by an importer (or the importer’s bank) depending on the documentation requirements of the letter of credit.
These other documents may include:
- A commercial invoice.
- A Certificate of Origin.
- An inspection certificate (which details the quality of the products or goods prior to shipment).
Once payment is received by the exporter, the bill of lading is then passed on to the importer’s bank and then the importer, who is now authorised to receive the goods at the dock.
Until the exporter is paid or they’re provided with a bill of exchange to pay at a future date, their bank retains control over the goods
The letter of credit is “irrevocable” so it cannot be amended or changed without agreement from all parties. Make sure you get it right the first time with help from a solicitor who specialises in commercial and trade finance.
What does sight and term basis mean?
Payments made on a ‘sight’ basis means that the exporter is immediately paid for their goods once the importer “sees” the bill of lading.
The other way that importers and exporters may decide to go about payment is through a ‘term’ basis.
This is typically where the exporter has agreed to extend credit to the importer and the final payment is paid off progressively, typically on a 30, 90 or 180 day term.
What are the benefits of trade finance?
- It’s a more secure way to get involved in international and domestic trade, especially if you’re just starting out.
- It allows to develop new business relationships in different international markets.
- With a trade advance loan, importers can get trade finance prior to the exporter shipping the goods.
- With the bank effectively acting as a third party, you’re avoiding a lot of the risk as an exporter since you can be paid immediately by your bank even if the importer refuses to make payment.
Be careful: the bank doesn’t take on all risk!
As an exporter, you’re not always guaranteed payment in situations where there is political instability or exchange rate risk.
Similarly, you have to be careful as an importer because lenders don’t typically assume transfer risk and certainly don’t assume responsibility for the goods that you receive.
It’s important sit down with your bank to discuss the terms of the letter of credit before committing. It may be you organise your own insurance through the bank beforehand.
It will cost you a little more but it may sometimes be worth the costs depending on how much you’re planning on importing.
There are other things to keep in mind when it comes to export finance and import finance.
How much does a letter of credit cost?
A letter of credit can be quite expensive depending on how much the bank is guaranteeing – the letter of credit is backed by the importer’s bank, after all.
Depending on your negotiations with the overseas business, each party may decide to either split or decide for one party to absorb these fees. It really depends on whether you plan on developing a long term business relationship or not.
Again, the transaction fee varies depending on the amount of the guarantee and the exchange risk of the overseas currency.
What currencies is trade finance available in?
All major currencies are available including US, Euro, Chinese Yuan and Japanese Yen.
Do you need trade finance?
One of the benefits of trade finance is that it’s governed by the International Chamber of Commerce (ICC) which means you can get some peace of mind.
Are you sick of the strain that importing or exporting is putting on your cash flow?
Reduce your risk and get back to focusing on growing your business with trade finance!
Call us on 1300 889 743 or complete our free assessment form to speak with one of our business loan specialists about your business needs.
We have great relationships with a number of commercial lenders so we can often negotiate great terms and also help you manage multiple credit facilities.