Trade finance is a means of bridging the funding gap between paying an exporter upfront and the importer receiving and selling the goods. As such, it can help boost the cash flow of SMEs during this time of financial limbo.
Craig Michie, head of specialised finance, is in charge of trade financing at Scottish Pacific, one of the growing number of alternative finance providers that offer trade financing. He says that for SMEs looking to export, trade financing should be seriously considered.
“The exporter wants to be paid upfront, and the importer needs time to land those goods and sell those goods and turn them into cash. A trade finance transaction can help [cover] that funding gap,” Craig says.
To qualify for trade finance, Craig says businesses are generally required to be turning over anywhere between $500,000 and $50 million annually. He recommends SMEs with lower levels of turnover to bolster their turnover up before exploring trade finance to make it a more viable and attractive option.
Additionally, Craig says that businesses should be operating for at least 12 months with a strong product idea, which includes necessary planning and structures in place.
So aside from providing a funding gap to aid exporters and importers, how can trade financing help your business grow?
Specific to an SME’s problem
According to Craig, there’s no hard or fast way to determine how much an SME can get out of trade financing, or how much it costs. This is because trade financing is able to adapt to an SME owner’s needs, depending on the exporting situation.
“Quite often, [trade financing] can be very bespoke solutions involving a range of currencies, so the customer can be buying and selling other than AUD, and we can certainly accommodate them when they need that flexibility,” Craig says.
He adds that trade finance can help a business with the “right opportunity, with the right business plan, the right structure, [but is not] able to source the finance”.
Less time spent struggling with banks
For SMEs approaching a bank for capital, the topic of security will surely come up. Trade financing can help SMEs secure extra funds without the need to up their own assets on the line as a consequence.
“When [SME owners] go to the banks or traditional lenders, they are required to provide additional security. If a business is growing and they've got opportunities to fill orders, they may not constantly have that additional security available,” Craig says.
“By focusing on the strengths and the transaction – i.e. we know that if our client in Australia can land these goods, they can sell these goods and generate a profit – we're more focused on the client and the balance sheet, as opposed to other types of security that may not be specifically linked to the transaction.”
Offsets the “tyranny of distance”
With Australia being the world’s largest island, business in general can be difficult for Australian businesses: either paying a premium to have stock shipped to the country, or struggling to export product abroad due to the costs and sheer distance.
According to Craig, trade finance can offset this hassle.
“In Australia, we suffer from what's called the tyranny of distance. In other words, we're a long way away from everything. If you compare it to people in Europe who might be sourcing products from maybe Eastern Europe, or even around Europe, Germany, etcetera, it's a lot quicker than sticking it on a boat and waiting for it to get to Australia,” he explains.
“We're at a bit of a disadvantage from that timeline point of view, so it puts more pressure on that importer in terms of being able to fund that transaction and make it profitable for them.
“[Trade finance] not only provide funding to allow time for the goods to be ordered, manufactured, and shipped and landed in Australia, or whichever country the customer resides in, [it] can also fund against the result and receivable, or invoice, if that customer requires additional trading terms which typically would not be necessarily offered to overseas customers.”
Keeps things simple
When it comes down to it, busy business owners don’t want to be delayed when exploring financing options – they want to run their business. As Craig explains, specialist finance providers tend to have much simpler and faster application time frames than traditional banks do.
“If you can land those goods and sell those goods, [trade financing] can help you pay for them, and that means your business will grow and continue to grow, and that's as pretty much as simple as it gets,” he concludes.