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Trade finance business line of credit: pros and cons

BlogEnterpriseYour business By Duncan Khoury – 29 July 2020
Want to power your growing business?

Do you feel like a lack of working capital is making your business stagnate? 

Maybe you know that you need extra funding to grow, but you’ve exhausted all of the traditional funding options. Perhaps you’re confident that your business will continue to flourish based on past performance, but you’re not sure how to finance new opportunities. And you’ve borrowed all you can from your bank, based on your personal assets. 

So where do you turn? 

That’s where trade finance can help. It acts as a business line of credit that gives you the working capital you need to fund your business growth. But what are the pros and cons? And how do you know whether this type of funding is right for your business?

Let’s dive into the advantages and disadvantages of trade finance.

First, what is trade finance?

Trade finance is a well-established business funding solution, used in 80-90% of trade worldwide. Think of it as a business ‘line of credit’ funding facility. 

This kind of financing gives your business quick access to funds by introducing a third-party financier into your supply chain. The process is simple:

  1. You buy goods from your supplier, either in Australia or overseas.
  2. Your financier lends you the money to pay that supplier.
  3. You then repay the financier with extended credit terms.

Trade finance funding helps to bridge the gap between paying for your goods and recouping your money when you sell them. In short, it gives you the working capital to keep your business running while you wait for your goods to arrive and commence the sales distribution process. 

What are the benefits of trade finance?

Businesses use trade finance to fund their business growth for many reasons – let’s examine the top four.

1. Control your working capital 

Are there advantages to a business line of credit vs a traditional loan? Definitely!

Traditional financial institutions usually demand asset security before they’ll lend you money. So if you’re short on personal assets, have maxed out your borrowing limit or don’t want to use your personal assets as collateral to begin with, your business can stagnate.

On the other hand, trade financiers often lend based on the risk of the trade and the strength of your business’ balance sheet, not on your personal assets. They examine your business and transaction values to determine your credit limit. That makes it easier to grow and scale your business as your sales increase. As your transaction values grow, so does your funding limit.

This benefit is especially important given the global events of 2020, wherein we have seen an increase in the average time debtors take to pay, and international suppliers requiring upfront deposits. These pressures widen your funding gap. 

You can close this gap and provide your business with a cash-flow advantage by pushing out your payables by up to 120 days with Octet’s Trade Finance facility

With our Trade Finance facility, we pay 100% of supplier invoice values, including any upfront deposit requirement. Together with our interest free terms of up to 60 days, this makes it a flexible and powerful financing tool for your business.

2. Flexibility with global transactions

International trade is complex at the best of times, so anything that makes the process smoother has to be good for your business. Using a trade finance platform makes it easy to pay suppliers in other countries and currencies. 

For example, our Trade Finance platform gives you single-click payment across 68 countries in your choice of up to 15 currencies which eliminates costly bank FX conversion fees. Or you can bring your own third party forward exchange contract to the transaction via the platform too. In just one click, you can authorise the payment, knowing that the FX is handled quickly and easily in a single, hassle-free step. 

3. Early repayment discounts

Using a trade finance facility makes your cash available shortly after you receive your supplier’s invoice. This enables you to take advantage of any early settlement discounts they may offer, which can ultimately save you money. 

With Octet’s Trade Finance solution, you can pay both international and domestic suppliers. And, for those domestic suppliers, this can be related to invoices for goods or services. This flexibility allows you to use the funding and seek early settlement discounts for a wider scope of supplier types and transactions than other funding options may allow. 

4. Reduce global trading risk

Trading internationally always comes with an element of risk. If you’re an importer, there’s the risk that your goods won’t arrive. As an exporter, you risk not being paid in a timely fashion once you’ve sent the shipment.

An intelligent solution like our Trade Finance facility makes it easier and safer to trade, regardless of which side of the transaction you’re on. That’s because both the buyer and supplier are registered and linked to one another on the Octet Supply Chain Platform

The platform’s embedded claim and authorisation process also enables seamless communication between both parties. This inherently ensures transparency and nullifies any dispute risk.

What about the disadvantages?

As with any financial decision, it’s essential to do your homework before signing up to a trade finance facility. Always investigate whether a given company and product is suitable for your business.

The top four factors to consider when you’re researching trade finance facilities are:

1. Eligibility

Not all businesses (pending their size, industry and specific requirements) are eligible for traditional funding. Do your research to find a solution that will work with your business.

As an example, our Trade Finance facility is open to Australian businesses that have: 

  • at least $3 million turnover
  • been profitable for the last 2-3 financial reporting periods
  • a positive balance sheet net worth.

2. Costs

As with any financing solution, there’s a cost to using trade finance. That means you need to understand your profit margins and expenses so you can build the cost into your trade. 

That way, the facility fees just becomes a normal cost of doing business, instead of being an added burden to your bottom line.

3. Product suitability

Most finance companies offer a range of products, but not all products will be suitable for your business. Do your research and seek advice on which product is best for you in your current circumstances.

In addition to our Trade Finance product, we also offer Debtor Finance and Supply Chain Accelerate. One (or all) of those products may be the best fit for your business.

In fact, by combining our Debtor Finance and Trade Finance facilities on our Supply Chain Platform, we can give your business an integrated funding package. Incorporating both facilities gives you a ‘back to back’ financing solution featuring:

  • A business line of credit to pay suppliers, with extended repayment terms to Octet, thanks to our Trade Finance facility
  • A drawable funding source leveraged against your receivables, thanks to our Debtor Finance facility

This ‘back to back’ financing solution can simplify those periods of rapid growth, especially when you win new projects or contracts with required initial expenditure. With this solution, you can leverage the increased sales revenue and mobilise that cash flow to close the funding gap. 

4. Clear obligations

All financial products can appear complicated when you start out, but they should have clear terms that they require both parties to follow. 

Make sure you understand any obligations that come with the funding facility. If you’re unsure of anything, get your financier to explain exactly what you need to do to fulfil your obligations for their product.

Find out whether Trade Finance is right for you

As with any business financing solution, there are pros and cons to using trade finance funding for your business. To check whether our Trade Finance facility is right for you, ask us to assess your business and help you make an informed decision. 

Get in touch today. 

Want to power your growing business?