How important is overseas trade to the UK economy?
According to the government figures, total trade exports for the UK were £5.8 billion in August 2020, while imports totalled £48.3 billion. While post-Brexit processes threaten the UK’s trade, there is no denying that trade remains an integral part of our economy and a role in many business’s operations.
But to facilitate this properly, businesses must have access to trade and finance tools that allow them to be successful in their chosen markets. They should have the opportunity to grow beyond the UK, safe knowing that the risks they are exposed to are minimised.
Selling overseas is an excellent prospect for many businesses, but there is a lot to consider as with every growth opportunity. Which markets should you enter? How do you find the right import/export partners? What are the rules for trading overseas? And perhaps most importantly, can you afford to do it?
Maintaining control of your cash flow is likely to be the single biggest challenge in taking your business to new markets—cue trade finance.
This blog will explain what trade finance is and how it can help you overcome cash flow barriers.
What is trade finance?
Trade finance is concerned with facilitating domestic and international trade transactions – when a buyer or seller in one country purchases from or sells goods to a business or individual in another country. By utilising trade finance, companies can find ways to affordably fund their imports and exports without exerting pressure onto their cash flow.
There are three main types of trade finance – export finance, import finance, and stock finance, with the objectives being to:
- Support growth plans
- Improve profit margins
- Increase efficiency and productivity
- Mitigate financial risks including bankruptcy
Each type can be applied to your business in different ways, depending on your operations and needs. Understanding each’s complexities will allow you to make an informed choice as to which suit you best. You may favour one type in particular, or you may mix the options at different stages to maximum results.
Usually, trade finance does not require equity release, so companies are not restricted in this way. Instead, they repay the loan down the line, once trade transactions are complete. In this sense, trade finance allows import and export to take place uninhibited by cash issues.
What is export finance?
Export finance allows businesses to release working capital from their overseas trade transactions. Without an export finance facility, this money could be tied up in invoices or purchase orders for anything up to 180 days. And, as a seller, the priority is to get paid and the money in your bank account as soon as possible. On the other hand, buyers work to delay payments with an interest in maintaining a positive cash flow of their own.
Export finance simply bridges this gap. It works to ensure trust between the buyer and the seller whilst mitigating the exposure for both. Export finance options include trade loans, trade discounting and supplier chain finance.
It also covers the UK Export Finance programme (UKEF) which offer finance and insurers to minimise risks for companies exporting overseas. The UKEF works with banks and lender to allow them to provide government-backed funding to businesses, offering competitive terms and enabling more people to sell abroad with confidence.
What is import finance?
Similarly to export finance, import finance closes the funding gap between an order you’ve received from a UK customer, and the payment required by your overseas supplier.
In this type of transaction, you will need to consider the costs of many things, including freight, duty and VAT. Import finance can fund 100 per cent of such overseas purchases until you have received your UK customer’s payment.
As a business, you may be importing finished goods, part-finished goods or even raw materials. Either way, a cost to you will be incurred, and an element of trust enrolled.
In some cases, reassurance in the form of letters of credit will suffice as a payment guarantee. In other situations, external funds, such as import loans or capital import finance, will facilitate the transfer of money straight away.
Import financing may also encompass invoice factoring, where working capital is released from outstanding invoices you have, enabling you to pay your supplier whilst you await your own repayment. This option will be advantageous to small importers who struggle to get funding through traditional means for their importing.
What is stock finance?
Stock finance differs slightly from export and import finance. It is not based on a single buyer and seller relationship but based on purchasing and storing stock to fulfil projected sales. Stock finance is excellent for international trade because a business effectively uses a lender’s funds to buy products to sell; whether this be finished goods or raw materials.
It is concerned with the movement, purchase and sale of goods. The lender will have security over the stock, which is likely to be held in a warehouse, for a given period of somewhere between 90-120 days. This revolving facility then enables a business to access cash as and when it needs it.
It is a handy form of asset finance, as it allows you to release working capital from stock that would otherwise just be sat in your warehouse. Instead, you can use it to secure funding to enable you to fulfil orders without pressuring your finances.
There is no doubt that small businesses will need to take some kind of financial risk to support their overseas growth plans, but putting sound finance deals in place will simply protect their position as they do so.
The trade finance options available offer these businesses an opportunity to release capital whilst still carrying out their essential operations and serving customers. With this, you have the capacity to grow your business to overseas audiences without overwhelming your finances.
If you would like to discuss how we could help you to reach your goals in trading overseas, whilst maintaining a positive cash flow, get in touch.