Trade finance tips for Scottish exporters

What is trade finance?

Trade finance is best described as the provision of credit facilities to meet a company’s borrowing needs in relation to their cross-border trade activities.

This bridges the funding gap between the credit given in the terms of trade and the need to fund stock and debtors.

Historically, this gap has been filled by overdraft facilities, which remain adequate solutions for international traders. But lenders and borrowers can gain several advantages from trade finance structures:

1. Trade finance solutions like documentary collection, documentary credits and credit insurance enable the bank or lender to gain transactional control and mitigate risk.

2. The facility you have is matched to your actual needs. It can be aligned with your transaction and trade cycle, typically tracking the difference between days sales outstanding (DSO) and days payables outstanding (DPO).

3. Repayment is more closely linked to the sale of the goods and services. Delays in payment or repayment date extension requests act as early warning signs of buyer liquidity problems.

Should you adopt trade finance structures?

While it may take time to pull together the necessary information, it’s well worth the effort.

Trade finance structures help your lender gain a greater understanding of the transaction. This can have a positive effect on their willingness to support your business. Your lender may be prepared to extend a trade facility even when your normal credit facilities are fully extended, or when your balance sheet does not support the transaction value.

As well as this, facility specific to each transaction enables you to evaluate the profitability of individual transactions, including the financial costs.

Where can you obtain export finance?

Banks

Banks are your most obvious option, as you already have an established relationship.

Your bank usually has an understanding of how you and your business perform. However, as more and more SMEs are served via online banking and cannot easily access trade specialists, this may not always be the case.

Most UK banks offer customers a range of products, like pre- and post-shipment finance loans, bill discounting and invoice financing.

When approaching your bank, my advice would be to prepare well in advance, detail what you need, prepare cashflow figures and determine your method of payment.

Specialist funders

A growing number of funders offer one-off or specific facilities for cross-border traders. This type of funding is obtained through the broker market or direct from the lender, with many offering add-ons or complimentary services like foreign exchange brokerage. 

Again, the better prepared you are, the greater the chance of a positive outcome.

UK Export Finance (UKEF)

UKEF is the UK Government’s export credit agency (ECA). It provides a various short- and medium-term products that enable exporters to finance their transactions.

The agency offers working capital and bond support on a contract- or non-contract-specific basis. For this type of assistance, you will need the support of your bank. Support can account for up to 80% of the contract value.

UKEF offers buyer/supplier finance, which looks at the financial strength of the overseas buyer. Buyer/supplier credit does not require any intervention by your bank, but transactions must be in excess of circa £750k.

UKEF can also provide insurance cover against buyer default when cover cannot be obtained from the commercial market.

Payment method

If you are using Letters of Credit as your payment method, you might be able to use this as a vehicle to support an advance from your bank or receive payment ahead of the agreed payment date.

Credit insurance

You may be able to use credit insurance to secure funding for the transaction. In the event of default, the proceeds from any claim can be assigned to the lender.

Conclusion

There are multiple ways to fund your exports, from generic products like overdrafts to more structured and complex trade finance products. Each transaction needs to be carefully looked at to ensure the optimum solution for the exporter.