Trade Finance

What is Trade Finance?

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Trade finance is a type of working capital financing designed to bridge the gap between purchasing stock and paying suppliers. It enables a business to secure the funds needed to pay an exporter on behalf of an importer, even before the goods are delivered. The financier provides upfront payment to the exporter, ensuring they’re compensated once goods are shipped, while giving the importer extended time to settle the debt. Essentially, trade finance minimises risks for both parties, ensuring smooth transactions and cash flow management.

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This type of financing is also referred to as purchase order finance or import finance, as it often centres around purchase orders. If you’re involved in importing or exporting goods both within Ireland or internationally, trade finance could be a helpful tool to support your business operations.

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Business Example

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Luca's Lighting is a small company that specialises in producing stylish, energy-efficient lighting solutions. After several months of growing sales within the UK, a well-known hotel chain in Europe places an order for 500 bespoke chandeliers to outfit their new locations. This is a significant opportunity for Luca, but his business typically only fulfils smaller, custom orders of 50-100 units a month, and he doesn’t have enough capital to pay his overseas supplier for such a large order.

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However, since the hotel chain and supplier are both established businesses, Luca approaches a trade finance provider. The trade finance company reviews the purchase order from the hotel and completes their due diligence. Once they’re satisfied with the arrangements, the lender pays Luca’s supplier directly, allowing them to start manufacturing the chandeliers sooner than usual. The supplier invoices the trade finance provider, and when the hotel pays for the completed order, Luca receives the profits minus the lender’s fees.

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Benefits of Trade Finance

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Fuelling Business Growth

Access to trade finance enables businesses to tackle larger orders they might otherwise struggle to fulfil, ensuring smooth daily operations without cash flow concerns.

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Enhanced Profit Potential

Businesses can buy in larger quantities, often benefiting from bulk discounts and strengthening relationships with suppliers. This offers opportunities to boost profit margins as well.

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Lower Risk of Financial Stress

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By using external funding or credit facilities, businesses can reduce the pressure that can come from delayed payments from customers, excess inventory, or creditor demands, which are common challenges for SMEs.

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How can you get Trade Finance? ​

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Many large banks, like HSBC and Barclays, tend to work with businesses generating millions in revenue, making them less accessible for smaller companies. However, smaller or alternative trade finance providers, such as Monetae, focus on helping SMEs with this type of financing.

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Is Trade Finance Right for You?

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If you answer “yes” to the following, trade finance could be a solution worth considering:

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• Do you have a purchase order that requires funding?

• Are you planning to import or export products for resale?

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Trade financiers usually focus on three things: the transaction at hand, the potential growth for your business, and the reliability of the parties involved. It’s a great option for businesses with strong supply chains and dependable customers, but that need a little extra help with working capital.

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Interest Rates

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Typically, trade finance interest rates range between 1.5% and 3%. Larger orders often result in lower rates. Your costs will also depend on factors like the reliability of your supplier and buyer, as these affect risk. If you’re considering using invoice finance alongside trade finance, remember that it may increase overall expenses, so it’s important to assess if it’s the right fit for your business.

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Ready to Explore Trade Finance?

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If trade finance seems like the solution you need to help your business grow, we’re here to guide you.