Keeping cash flow healthy is absolutely vital for business success. Running out of cash is the nightmare scenario that keeps many business owners awake at night. If you have growth plans, it’s not just a case of ensuring there is enough cash in the bank to survive. You also need sufficient working capital to take advantage of any new opportunity that comes along. Trade finance is a useful tool that covers both of these bases.

How does trade finance work?

Trade finance provides instant funds on the basis of work or orders that your client will pay for at a future date. Typically, trade finance is available on a confirmed order basis. So if you have a purchase order from a customer, for example, trade finance will provide the cash you need to fulfil it. This can include procuring the materials, provide the product or service and deliver it to the customer. For this reason, trade finance is sometimes referred to as purchase order finance. It’s also known as Supply Chain Finance, as the credit supports the whole supply chain.

What are the terms?

Interest rates will vary on a case by case basis, as the risk to the lender depends on the reliability of the supplier and the buyer you are working with. Typically, however, you will be looking at an interest rate that is somewhere around the one to two percent mark per 30 days. The amount you can borrow depends on the size of the purchase order, and the repayment terms are usually up to 120 days. The good thing about trade finance is that it is very much a bespoke type of funding, so these are just illustrative figures.

Am I eligible for trade finance?

Any B2B business buying stock from one business and selling to another business is likely to be eligible for trade finance. As the financing is on the basis of other parties in the supply chain, a sketchy or less than perfect credit history needs not be a barrier to taking advantage of this kind of facility. In that respect, it is a form of credit that focuses very much on the here and now. The lender is less concerned about what’s happened in the past, or what assets you have or haven’t got on your balance sheet. They are more concerned about the transaction that will underpin the finance. How much is it worth, who are the other parties involved and just how much benefit is it going to deliver to your business?

Having said that stronger borrowers will be those with a balance sheet net worth more than £100k, turnover above £1m and trading for at least 2 years. If you’ve got a track record of fulfilling purchase orders then that’s a real plus too.

Using trade finance with invoice finance

Trade finance can dovetail well with other types of funding, particularly invoice finance. While trade finance bridges the gap between ordering the materials or stock you need to deliver your product or service, the latter helps you through the time between invoicing your customer and them settling the bill. Here’s how trade finance typically works alongside invoice finance:

1. Purchase order received from your client for your product
2. You place an order with your supplier 
3. Trade finance lender pays your supplier when the stock is ready to be shipped
4. You receive stock and sell onwards to your client
5. On raising your invoice your invoice finance facility kicks in and repays the outstanding trade finance
6. Your client pays your invoice, paying off the outstanding invoice finance borrowing