What is trade finance and how can it be used as a tool to power growth for your business?

What is trade finance?

Trade finance is simply financing for trade, it denotes the financial instruments and products used by businesses to facilitate trade and commerce.

How does trade finance work?

Trade finance works by introducing a third-party financier into your transaction. The financier sits between the buyer and the seller and acts as an intermediary, providing funds to facilitate the transaction.

Types of trade finance products

• Purchase order financing — Purchase order financing is a cash advance that you can receive on your purchase order. With PO financing, a lender pays your supplier up to 100% of the costs required to fulfill a customer’s order.
• Invoice discounting/factoring — Invoice discounting & factoring are forms of accounts receivables financing that allow businesses to get funding quickly for unpaid invoices. Financiers advance sellers up to 90% of the unpaid invoice and get repaid by the buyers at the original maturity date.
• Forfaiting — Forfaiting is a method of trade finance that allows exporters to obtain cash by selling their medium and long-term foreign accounts receivable at a discount. Unlike invoicing financing, forfaiters typically work with exporters who sell capital goods and commodities, or engage in large projects and therefore need to offer extended credit periods from 180 days to seven years or more.
• Letter of credit — A letter of credit is essentially a financial contract between a bank, a bank’s customer (the importer), and a beneficiary (exporter). The letter of credit, which is usually issued by an importer’s bank, guarantees that the beneficiary (exporter) will be paid once the conditions of the transaction and the letter of credit are met.
• Consignment sale — Consignment is a variation of the open-account method of payment in international trade in which payment is sent to the exporter only after the goods have been sold to the end customer by the foreign distributor. A contract governs an international consignment transaction in which the foreign distributor receives, manages, and sells goods for the exporter, who retains title to the goods until they are sold. Payment to the exporter is only required for items sold.
• Swap agreement — Swap agreements are contracts that allow two transacting agents to “swap” revenue streams arising from some underlying assets held by each party. Nigeria’s 2018 swap agreement with China was signed to provide financing for trade transactions between the two nations. The swap agreement had a three-year term and allowed both the CBN and the PBoC to swap up to fifteen billion renminbi/Chinese yuan (CNY 15 billion) for seven hundred and twenty billion naira (NGN 720 Billion). Using an exchange rate of NGN305:1US$, this amount is equivalent to US$2.5 billion.
• Banker’s acceptance — A banker’s acceptance is a short-term issuance by a bank that guarantees payment at a later time. A banker’s acceptance is often used in importing and exporting, with the importer’s bank guaranteeing payment to the exporter.
• Bartering — Bartering is trading one good or service for another without using a medium of exchange such as money. This is the earliest form of trade and the foundation on which the first monetary systems were built.

Advantages of trade finance

Better Cash Flow Management

Having cash available and a predictable cash flow is essential. Trade finance frees up your working capital, allowing you to take charge of your finances, plan better and pursue other avenues of revenue generation.

Reduces Risk

Trade finance can help reduce the risk associated with global trade by reconciling an exporter’s and importer’s disparate needs. An exporter would prefer that the importer pays for an export shipment in advance to avoid the risk that the importer accepts the shipment but refuses to pay for the goods. If, on the other hand, the importer pays the exporter in advance, the exporter may accept the payment but refuse to ship the goods.

Flexibility

Trade financing offers flexible, secure, and scalable cash flow solutions to support growth for your SME. It also allows importers to finance their purchase orders and fulfill larger orders, additionally, exporters can convert receivables into cash to meet short-term funding needs.

Convenience

Funding is based on the value of your confirmed invoices and purchase orders, and factors such as credit score and collateral, have no bearing on your eligibility or qualifying for financing. This provides your company with more scalable and flexible financing options than traditional bank lending programmes.

Competitive Advantage

Small and medium-sized businesses involved in trade usually have limited resources and low financial backing, opting for trade finance allows them to grow and capitalize on significant competitive opportunities.

Breeze Invoice Factoring & Purchase Order Finance Facility.

After determining whether trade financing is necessary for your company, the next step is to find the right partner. Breeze provides flexible trade finance products that provide your company with the funds it needs to capitalize on opportunities. We offer businesses the ability to sell their invoices for cash and finance purchase orders for both import and export transactions through our products Express and Accelerate.

Express: Express is an invoice discounting tool for businesses that need to free up cash locked up in unpaid invoices. Businesses involved in global trade usually get paid 90–180 days after the delivery of goods, leaving them short on cash that could be used for operations or to capitalize on opportunities. Express allows businesses to sell their invoices for a cash advance of up to $5,000,000.

Accelerate: Accelerate is a purchase order financing tool designed for businesses that need funds to fulfill large customer orders. Sometimes businesses do not have enough cash to fulfill larger orders and taking out that much cash may be detrimental to your cash flow. Businesses can use Accelerate to finance their purchase orders.

What currencies are available?

Breeze provides financing in 5 major global currencies — USD, GBP, EUR, NGN, and AED. Financing is available for both local and international transactions.

What are the fees?

Our fees are calculated on an individual basis based on the amount of the transaction and the amount of time until the maturity date. Our rates begin at 1.5% per 30 days and go up to a maximum of 180 days.

Please check out our website www.breeze.africa and contact sales if trade financing is what your business needs to get to the next level. #TradeWithEase.