Trade Finance: Funding Australian Business Cashflow & Growth

What is Trade Finance?

I often get asked by business owners what trade finance actually is.

There’s a misconception that it only applies to businesses importing products from overseas, but that isn’t entirely true. Plenty of businesses use trade finance to pay Australian suppliers too.

At its simplest, trade finance is about funding the gap between when you need to pay for goods and when you eventually get paid for selling them.

And for many growing businesses, that gap can be substantial.

Let’s run through a situation.

A business owner lands a large order from a well-known retail chain. It’s exactly the sort of order they want, but there’s a problem. Their overseas supplier requires a 30% deposit upfront, with the balance payable before the goods are shipped.

The goods then take six weeks to arrive in Australia. Once they land, they need to be delivered to the customer, invoiced, and then the customer pays on its normal trading terms.

The business could therefore be funding that order for several months before seeing the cash come back.

That gap between paying the supplier and getting paid by the customer is exactly what trade finance is built for.

How Trade Finance Actually Works

Trade finance funds the purchase of goods, stock or materials before you’ve sold them on.

Rather than the business paying the supplier entirely from its own cash reserves, the trade finance provider funds the approved purchase.

The business receives the goods, sells them to its customers and then repays the trade finance facility, typically from the cashflow generated when those customers pay.

Depending on the facility and the transaction, the funding period might be 60, 90 or 120 days.

This is an important distinction.

A traditional business loan generally provides a lump sum of money that the business then repays over an agreed period. Trade finance is designed around the actual buying and selling cycle of the business.

It is funding a transaction.

The lender will usually want to understand what is being purchased, who the supplier is, who the end customer is, the margins involved and how the transaction ultimately converts back into cash.

Security structures also vary between lenders and facilities. Depending on the circumstances, security usually requires a security charge of the businesses assets and director guarantees, rather than on property security.

For Australian importers, wholesalers, distributors and manufacturers buying materials or finished goods from overseas or domestic suppliers, this can be the difference between accepting an order and turning one down because the cash simply isn’t there yet.

Trade finance facilities can range from relatively modest limits to several million dollars. ($100,000 through to $10 million), depending on the client’s requirements, transaction size, financial performance and overall strength of the business.

It’s Not Just About Imports

One of the biggest misconceptions about trade finance is that you need to be importing containers from China, Europe or the US to use it.

You don’t.

Trade finance can also be used for purchases from Australian suppliers.

Consider a manufacturer that receives a large contract requiring significantly more raw materials than it normally holds. Its supplier wants payment in 30 days, but the manufacturer won’t receive payment from its customer for another 60 or 90 days.

The fact that the supplier happens to be in Australia doesn’t remove the cashflow gap.

The same principle applies.

The business needs to buy something today that will generate revenue tomorrow.

What are Some of the Misconceptions About Trade Finance?

There are three things I hear regularly about trade finance. None of them are true.

“It’s only for big companies.”

Size matters, but it isn’t the only consideration. The lender is also looking at the strength of the transaction, the supplier, the customer base, margins, financial performance and whether there is a clear path to repayment.

“It means the lender thinks my business is risky.”

Wrong direction.

Trade finance exists because the trade cycle creates a genuine and predictable cash gap, not because a lender necessarily has doubts about the business.

In fact, a profitable and rapidly growing business can experience significant cashflow pressure precisely because it is growing.

Every new order requires more stock. More stock requires more cash. Larger customers can mean larger invoices and longer payment terms.

Growth can consume cash surprisingly quickly.

Well-run businesses use trade finance because they understand their cash conversion cycle and don’t want growth constrained by the amount of cash sitting in their bank account.

“It’s too complicated to bother with.”

The paperwork can be more involved than a simple overdraft, granted.

The lender needs to understand the underlying transactions because that is what they are funding.

But most of that complexity sits with the broker and lender, not with the business owner.

The real barrier isn’t complexity. It’s that many business owners have never had anyone explain how trade finance actually works and the benefits it can bring to their business, so they assume it’s either too difficult or simply not available to them.

Usually, it isn’t.

What are the Benefits of Trade Finance?

So, what changes when a business gets trade finance right?

One manufacturing client used to regularly turn down repeat orders from some of his customers.

His supplier wanted 40% upfront, while his own customers paid on 60-day terms. He simply didn’t have enough cash sitting idle to continually make those supplier payments while waiting for earlier orders to be paid.

There was nothing wrong with the business.

The orders were profitable. The customers were good. The problem was timing.

With a trade finance facility in place, he could accept the orders that made commercial sense. The facility funded the supplier, he received and sold the stock, and the facility was repaid through business cashflow, typically once his customer paid within 60 to 75 days.

He no longer had to turn away good business simply because his cash was tied up somewhere else.

That distinction matters.

Trade finance shouldn’t be used to make an unprofitable transaction profitable. Funding doesn’t fix a bad margin.

What it can do is remove a cashflow constraint from an otherwise profitable transaction.

It Can Also Change the Supplier Conversation.

There’s another benefit that is sometimes overlooked.

Having funding available can put a business in a stronger position when negotiating with suppliers.

A supplier may offer better pricing for larger orders. They might offer a discount for earlier payment. A business may also be able to consolidate purchases rather than ordering smaller quantities simply because that is all its available cash allows.

Of course, buying more stock just to obtain a discount isn’t automatically a good strategy. You still need to understand demand, margins and stock turnover.

But when the commercial rationale is sound, access to trade finance can give the business more purchasing flexibility.

It can also protect supplier relationships because suppliers are being paid according to the terms agreed with them rather than having to wait while the business chases its own customers for payment.

How Trade Finance can Match the Trade Cycle

The key is getting the structure right.

A business buying stock that takes 45 days to manufacture, another 30 days to ship and then offering customers 60-day payment terms has a very different cash conversion cycle from a business buying locally and turning its stock every three weeks.

The finance should reflect that.

That’s why the first question shouldn’t simply be, “What interest rate can I get?”

It should be:

“How long is my cash tied up from the day I commit to the purchase until the day my customer pays me?”

Once you understand that number, you can start looking at what type and amount of funding actually fits the business.

Because the cheapest facility on paper can become very expensive if it doesn’t match the way the business trades.

Grow at the Pace of Your Opportunities

The benefits of trade finance aren’t only about surviving a cash gap.

Done properly, trade finance allows a business to grow at the pace of its opportunities rather than the pace of its bank balance.

It can allow you to accept profitable orders you might otherwise have turned away. It can protect supplier relationships because payments arrive when promised. It can give you greater purchasing power and potentially access to better supplier terms.

And importantly, it can stop businesses using other lines of credit to fund a working capital gap they weren’t designed for.

If you’re regularly receiving good orders but finding yourself asking, “How are we going to fund the stock?”, the problem may not be a lack of profitability.

It may simply be that your funding structure hasn’t kept pace with your business.

And that is exactly the problem trade finance was designed to solve.

Full Q&A on trade finance: https://www.pfbs.com.au/questionsandanswerstradefinance

For more informative information on other working capital products:https://brokercodex.com.au/articles/australian-business-your-invoices-could-unlock-more-cashflow