What is Trade Finance & how can it benefit your business?
Updated: Aug 8, 2018
There are various definitions to be found online as to what trade finance is. Trade finance concerns both domestic and international trade transactions. Trade finance bridges the finance gap between the time you have to pay your supplier and the time you receive payment from your debtor.
Trade Finance is designed to assist with the purchase of inventory. It is a means of short-term finance over and above your existing bank facility
Trade finance is an important external source of working capital financing. It is a form of short-term credit typically used by companies that import and/or export.
Simply put, trade finance enables a business to acquire products that it needs to conduct operations. Typically in a wholesale/distribution business, this would be stock, and in a manufacturing concern this would be raw materials. For example, an importer and distributor of brushware would use a trade finance facility to import mops, brooms, paintbrushes & many other related products.
Why consider a trade finance facility?
There are many reasons, some obvious, some less so. In no particular order of importance:
South African banks, which are in most cases the primary source of working capital finance for small and medium sized business, adopt a conservative approach to granting credit, which is mostly security based. This is not a criticism of the banking industry’s approach, but it can and does lead to difficulties in obtaining credit and enabling a business to grow.
A separate trade finance facility like the one offered by Anglo Cape, which specialises in this area, does not interfere with your existing bank facilities.
The facility can be used for both local and international transactions.
Where a business sources most of its purchases locally, typically on a 30 / 60 day net payment term, a trade finance facility can be used to pay the supplier in cash to obtain a discount and the credit term can be extended by the trade financier.
Benefits of a Trade Finance Facility:
Once a facility is put in place with Anglo Cape, you can use this facility when necessary i.e. if there are certain times of the year that require your business to hold more stock, you can use the facility to pay your supplier no matter where they are based in the world. This would ease the strain on the business’s cash-flow and enable it to use this cash to fund the day to day operations and use the separate trade finance facility to fund the increase in stock purchases.
The upfront payment to your supplier in their local currency reduces the currency risk. It also enables you to accurately cost your purchase because you will receive a Rand invoice from Anglo Cape for payment/s made to your supplier in the foreign currency. It may also enable you to negotiate significant discounts for upfront payments. Because of Anglo Cape’s size we have the ability to make swift decisions and be flexible to our clients needs & requirements. For example if a client originally required 90 days but now requires 120 days, this is a decision that can be made very swiftly without a lot of bureaucracy that you would normally have to go through with a larger financial institution and banks. Each transaction is treated independently and according to its own merits. We take a contextual view for each transaction.
Once the credit process is completed and the credit line is established, the process flow is very simple. The company would just draw down the line of credit as required. Unlike some other companies Anglo Cape does not get involved in the shipment & logistics. Anglo Cape’s sole function is the financing of the goods.
Having a facility in place offers security to your business as well as to your supplier. The supplier has the reassurance that the payment will be made by an established financial institution and if there is any unforeseen circumstances that require you to purchase stock, your business has access to a line of credit.
4. Process flow:
The size of Anglo Cape ensures that new applications are processed swiftly and credit decisions are made within 5 days. Anglo Cape is small enough to nurture close relationships with their clients and to offer flexible solutions to match their clients’ needs.
Please feel free to contact us to find out more information on how our trade finance facility can be of benefit to your business.