What is Trade Finance? A comprehensive guide

Trade finance is a business ‘line of credit’ funding facility that’s ideal if you buy from (or sell to) other businesses, whether they’re overseas or local. As a buyer, it lets you pay your supplier immediately, then pay back the credit facility over time. As a seller, it simply allows you to get paid quicker.

Let’s face it – if you’re importing or even buying locally, you don’t want all your available cash tied up in paying for goods that can take weeks to arrive. You can’t even begin to make your money back until you have the items in stock and start selling them. So if you have to pay out a large sum upfront, how do you smooth over that cash flow gap?

Meanwhile, as an exporter, you need to get paid as soon as possible to keep your own cash flow healthy. The longer it takes between sending the goods and receiving payment, the longer your working capital is tied up in the transaction.

That’s where trade finance funding can help.

Trade finance works by introducing a third party financier into your transaction. This financier puts up the money to pay the supplier, then lets the buyer (your business) repay it with extended credit terms.

This gives you working capital to keep your business running while the goods are in transit.

While plugging the cash flow gap is a major reason that many businesses decide to use trade finance, it also has other advantages.

Reduce global trading risks

International trade transactions carry a lot of risk, and have few (sometimes no) safeguards. If you import goods, you can never be guaranteed that those goods will actually be delivered. If you export, you risk not being paid for your products.

Using an intelligent trade finance solution as part of your supply chain can make it easier and safer for you to trade.

Both parties to a transaction have to sign up for the facility and be verified before it can go ahead. Having the financier check both parties to make sure they’re legitimate first, helps to significantly reduce these global trading risks.

Reduce currency fluctuation risks

Another inherent risk in any international transaction is constantly shifting exchange rates. If the rate between the Australian dollar and your supplier’s currency changes dramatically overnight, you could find yourself suddenly owing a lot more than you’d budgeted.

Trade finance can guard against these currency fluctuations by setting the exchange rate for the transaction upfront.

Save money on early payments

If you’re importing, having cash immediately available lets you take advantage of any early settlement discounts your supplier is offering. That saves you money on your goods and services, and allows you to pay the money back over a longer time frame to your financier.

Octet’s Trade Finance facility gives you the power to bridge the cash flow gap. To be eligible, your business will generally need to:

• turn over at least AUD 3 million
• have been trading profitably for at least two of the last three financial reporting periods
• have a positive balance sheet net worth.

The amount of funding you can access depends on your business. We’ll look at your most recent financials and management accounts to calculate a limit based on your business’s tangible net worth, including factors like: 

• your equity 
• your cash position
• how profitable your business is

• Close your working capital gap. We offer up to 120-day payment terms, so you can pay your suppliers immediately, then pay us back over time. 
• Unsecured. Our non-bank trade finance is completely unsecured. We don’t use your real estate or personal assets as security to offer you finance.
• Quick turnaround. You’ll get an answer to your finance application within days – not months. That’s much faster than with traditional options. 
• Flexibility. You can use our finance either as your main funding facility, or to supplement traditional financing. So if you want to diversify or your bank isn’t servicing your needs sufficiently, you can use Trade Finance as top-up funding.
• Easy international trading. Our Trade Finance facility makes it easy to pay suppliers in over 68 countries in a choice of 15 global currencies.
• Secure platform and trading. We verify all members in our system to give you confidence that your trading partner is legitimate. And our information systems use best-in-class firewalls, encryption, hardware and procedures to keep your data secure.

Our Trade Finance facility has a simple workflow.

1. Submit your application. Apply online, and if you’re successful, we’ll approve you and give you a facility limit.  
2. Invite a trading partner. Add your domestic and international suppliers to the Octet platform. You don’t have to add all your suppliers to the system – just the ones you want to use the facility for. We’ll then ask them to enter their details so we can verify them.
3. Place your order. Add your order to the platform. Our system will notify your supplier so they can accept the order. You can upload any documents needed for the transaction – such as the purchase order, invoice and bill of lading – through the system.
4. Authorise payment. Once the transaction is complete, you authorise the order and choose which funding methods you want to use to pay. This might be our Trade Finance facility, a credit card or a bank facility – or you could split the payment across multiple methods.

It’s that simple and safe. Our closed-loop system ensures the upload of all necessary documents, such as the bill of lading, before the order can be approved. That means you can be assured the transaction is valid before you pay.

Our Trade Finance facility helps you to smooth out the cash flow curves in your business.

For example, let’s say your business makes sunscreen. As a seasonal business, you know you’ll need to order a lot of stock as the warmer months approach. Having your own Trade Finance facility helps to reduce the cash flow pressure that you know will build at that time.

Plus, in uncertain business climates, many businesses are under strain and need cash flow to survive day-to-day. Octet’s Trade Finance solution can help to plug the cash flow gap that results from a market slowdown.

Of course, regardless of the climate, other businesses may be flourishing and need extra cash to take advantage of opportunities for growth. In these cases, Trade Finance funding can provide a cash flow injection to help deal with demand.

No matter whether you need help to ride out the storm or fund exciting growth opportunities, trade finance will help your business power through.  

Find out more about our Trade Finance facility and if it’s right for your business, or view our suite of working capital products to find the best solution for your business needs.