Understanding Trade Finance When Importing Stock

Container ShipWhilst nobody would disagree that it has been extraordinarily tough for business and in particular SME’s since 2008 the fact remains that the insane optimism of entrepreneurs has shone through the financial mire and many thousands of new ventures have been started and many have flourished.

Those entrepreneurs who take the plunge into new ventures are an inspiration for everybody and should be acknowledged as such. Equally those businesses that have survived the horrors of the last six years offer us stark lessons about how resilience, perseverance and sheer hard work can achieve remarkable things. But what is it that makes one idea or business prosper and another fail? There are clearly countless reasons but one of the key factors in my opinion is ensuring that the venture fits within the economic back drop that exists at the time; don’t fight the times but work with what is in demand and what resources are available.

Be aware of not just the UK market but also overseas markets where the economic climate may well be different; we are in a global market that can be accessed by SME’s just as readily as multi nationals. UK business has always been good at finding niche markets for niche products. We have, in the UK, inventive and creative business people which is exactly what the current economic challenges demand; the world of finance needs to support them.

It has never been easier to set up a business than it is today. The ability to reach a worldwide audience and advertise your product instantly via the web is a huge benefit and one that has really only been available to businesses since the dot.com revolution occurred in 1999-2001.

A business really can be up and running within a matter of weeks and advertising its product and services to a worldwide audience. In some respects that is the easy bit and maybe the hard graft required to make it work is glossed over by some. The entrepreneurial spirit tends in my opinion to focus on selling the idea/product and will in many cases regard the winning of the order as the zenith of the sales process; it is however only half the challenge as once won goods need to be purchased and the contract needs to be delivered. The funding nightmare has begun and can be a severe challenge.

It was a simple process pre 2008 of going to your bank and borrowing sufficient funds to place the orders; debt was cheap and perhaps too freely available. Since that time as noted above the landscape has changed. However when criticizing the banking world it is an often ignored fact that banks lend against security; if there is none then they quite understandably won’t lend.

One of the great advantages of being an exporting business based in the UK is that there are a number of initiatives and organizations set up specifically to assist with export. In particular I am referring to organizations such as UKTI and ECGD.

It is vitally important that when a business is looking to enter new markets and new territories that they understand the cultural, legal and social differences that make business work in that territory. Whilst it is one of the great achievements of modern times to have universal procedures and documentation for world trade it is still important to have practical help to guide you through the local markets differences. This is where the knowledge of groups such as UKTI and the international network through for example UK Embassy’s not only give knowledge and experience but also provide vital confidence when pitching for and winning business overseas.

Once the hard won contract is secured organisations such as ECGD can help with insurance products to help guarantee payments. Unfortunately some of these products have not been completely thought through and in my experience need a reasonable amount of work to get them right in a number of situations. In fairness to the ECGD there is a willingness to help adapt the products if asked the right questions and perhaps more importantly provided with the right answer!

Many businesses use factoring and invoice discounting and quite rightly so as it is a very good product when used in the right situations. What it doesn’t do however is really extend into the supply chain as far as some providers of the service might suggest. It really only comes into play when the invoice has been raised and the goods delivered. This can become a challenge when the end customer is overseas.

Many UK invoice finance businesses do not offer their services for debts that are due from overseas entities. In these instances one of the few total solutions can be real trade finance. True trade finance as I like to call it allows a client who has won a contract overseas to supply finished goods to fund the complete supply chain.

The key difference is that a true trade financier will not lend money but will physically buy and sell goods against a confirmed purchase order or contract. The risk is partly managed by owning the goods ordered rather than lending money.

The challenge for the UK business was that whilst there was an inbound letter of credit for the project the LC needed confirming and the various components that made up the order needed to be purchased and assembled prior to delivery to the country in question. The client had exhausted its own ability to fund its supply chain and was not able to gain sufficient support from its own bank. It was at this point that true trade finance was brought to bear.

Against the contract and the inbound LC the trade financier was able to purchase the various components taking the risk of assembly and delivery of the goods. It is important in all cases to understand the risk and in particular the ability to sell on the components if the order fails for any reason. This ability to assess, price and accept risk is perhaps the biggest difference between the lending model of trade finance, as offered by banks, and the trading model as offered by true trade financiers.

* Commentary given by Stephen Gruenewald of Global Asset Finance Ltd.