This insight was written by Andy Quinn, Banking & Finance Director at MHA.
Whether a business sells to overseas clients or sources raw materials from international suppliers, Trade Finance can play a critical role in reducing payment risk, improving cash flow and enabling businesses to trade with confidence, Banking & Finance Director Andy Quinn explains.
Expanding overseas is often seen as a key driver for a business’s long term success, but can also involve various pitfalls such as long shipping times leading to cash flow pressures, differing legal systems and unfamiliar counterparties. At its core, Trade Finance helps bridge trust and liquidity gaps so businesses can operate with confidence.
Trade Finance covers a variety of facilities, many of which can also be used domestically, with one of the most common being Letters of Credit (LC). LC’s themselves have several versions which can be tailored to the specific deal but are essentially a funder’s promise to pay the exporter once all predetermined conditions, such as confirmation of complete shipping documents, are satisfied, providing sellers confidence that they will be paid and buyers reassurance they are getting what they ordered before releasing funds.
Andrew Thurston highlights the importance of aligning LC’s and other trade finance instruments with the contractual obligations and Incoterms:
"When exporting or importing, it’s essential for a business to understand not just what they’re agreeing to in a contract, but also their responsibilities around customs, origin, and Incoterms. Getting these right helps avoid delays, unexpected duties, and ensures finance like letters of credit is correctly aligned with the trade cycle."
Guarantees such as Performance Bonds, Advance Payment Guarantees and Bid Bonds are also a key part of Trade Finance, providing counterparties with reassurance that contractual obligations will be met and often form a key part of companies bidding for large overseas contracts.
Import/ Export Loans, Purchase Order Finance and Pre/Post-Shipment Finance are used to bridge the gap between paying for goods and receiving revenue from sales, often themselves backing into and being refinanced through the likes of an Invoice Discounting facility, aligning with trade cycles to reduce pressure on Working Capital and enabling companies to scale up without the need for large cash reserves.
Andrew Thurston emphasizes the value of understanding the total financial and operational exposure:
"Businesses need funding that covers all potential costs, including duties, customs, and compliance obligations, so goods can actually reach the customer without unexpected delays or expenses."
Due to the breadth of Trade Finance facilities, businesses should consider analysing their Trade Cycle; when cash goes out, when cash comes in and identifying any pain points in their supply chain, whilst also taking into account potential Foreign Exchange risks.
Businesses that integrate Trade Finance into their financial planning can unlock greater buying power, improved liquidity, more secure transactions, and the ability to expand into new markets with confidence. With guidance from experts like Andrew Thurston in our Customs team and the MHA Banking & Finance team, businesses can navigate the intricacies of international trade and ensure their financial structures are aligned with operational realities.
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