Trade Financing for Small- and Medium-Sized Enterprises
Trade financing is often called ‘purchase order finance’. It’s a relatively new term, a product of globalization and international trade, and it has helped many small and medium-sized enterprises all over the world. Despite its importance, very few people understand exactly what it is, however. Trade finance is now becoming an important tool for businesses all over the world.
Here’s a basic problem: banks rely more and more on technology and statistics, which makes them less inclined to lend to small and medium enterprises, to avoid risk. Trade financing solves this problem and provides those lesser-known companies with a means to grow. But still, what exactly is trade financing? How does it work? And what are the advantages? Here are the top benefits offering by trade financing to small- and medium-sized enterprises.
Trade finance – step by step explained
Basically, trade finance helps companies bridge payments. It’s a flexible solution, especially for those dealing internationally. Here’s how it works:
- You receive an order.
- You need supplies from overseas. Order those (internationally) and your supplier will then provide you with an invoice that you have to pay. Typically, you receive all the paperwork and a demand to pay a certain percentage upfront.
- A lender will pay this; you can focus on preparing and delivering the order – at which point you write an invoice to your customer.
- Your lender will collect the money from your customer, retain a certain percentage, and pay you the remainder.
What are the benefits?
It may seem a little complicated, but basically it means your business receives help in paying your orders, in return for a percentage of what you collect from your customers. Here are the advantages:
- Your cash flow is significantly improved: you can retain your average account balance because there are lenders advancing payment to your suppliers.
- Often, the trade financing company takes care of the documentation, which means less administration (and fewer headaches) for you.
- Most facilities are flexible and offer cash when you need it, no matter how much you need it.
How can you get into the game?
There are many finance brokers available, and they can talk to you about your options – there will be different requirements depending on the kind of business you are in. A lender needs to understand your needs, and the brokers can match their requirements with your goals. They also help with effective cost-management.
It’s all about cash flow – and overcoming the challenges a small and medium-sized business may have, especially when ordering from abroad, trading internationally, and the risk those dealings pose. Trade finance is all about overcoming payment problems, shipping timetable conflicts, or customs compliance. It’s about making business possible for everyone, not just the large companies.