There are a lot of expenses that come with running a business, especially when you’re purchasing, importing, or exporting goods as a key part of your operation.
It can be particularly challenging when you need to import a bulk order of a key product to meet an order, but you need to pay for it upfront and wait for customer payment. This can take a major hit on your working capital, and without proper financing, it can keep your hands tied and prevent proper growth.
Trade finance is an excellent solution to this problem, allowing you to get capital quickly so that you can keep operations running as normal, working ahead instead of always struggling to catch up.
What Exactly Is Trade Finance?
Trade finance (also sometimes known as “receivables financing” or “invoice financing”) allows businesses to receive payment on outstanding invoices early from a third-party for a small fee. You’re essentially getting a cash advance from the financial institution and your customer will pay the invoice directly to the provider.
It’s not uncommon for many customers to offer net30, net60, or even longer terms for larger sales, and waiting for 60+ days to receive payment is the last thing most businesses want to do.
Most financing institutions allow businesses to choose which invoices they’d like to receive payment for. You can choose to fund all of your outstanding invoices, or only on select ones.
Some businesses choose to only receive financing for their largest invoices or those they expect to take the longest to be paid, freeing up capital and restoring significant cash flow quickly.
How Does It work?
Trade financing is a relatively straightforward process. You’ll first need to be approved by a third-party financing company like Raistone.
You may be asked to submit documentation like updated federal taxes, a background report of your business owners, and information about your customers. In many cases, the provider will review the individual customers for credit purposes, as the decision to fund is often largely based on the customer’s credit.
Once approved, the next steps in the process depends on the provider you selected and their use of technology to streamline (or not) the process. Examples of potential processes include:
- You submit the invoices of your choice to the provider, they’ll likely verify them with the customer.
- You physically upload the invoices that you are interested in receiving an advanced payment for.
- And some providers, like Raistone, have integrations through the customers’ ERP or einvoice platform. This means the process is easy and straightforward: you simply view the approved invoices for acceleration on their platform, and decide if you would like to advance from one to up to all of your invoices. With a click you can receive payment in as quickly as one day.
Once you select your invoices, the provider will pay you the majority of the balance. While some providers will typically pay you around 80% of the total value of the invoice, others will advance up to 100%. The advance percent varies depending on a number of factors, including the customer’s creditworthiness.
With some lenders, you can receive your payment in as quickly as the same business day from the time you select your invoice. Others can take longer to get you the payment, once again, it typically depends on their use of technology to streamline the process.
Once the customer pays the provider (which they do directly), the provider will send you the remaining balance of the invoice, minus a small financing fee. Keep in mind that some providers take the fee upfront, so in this scenario, you will receive any balances due to you if you were not advanced 100% of the total.
Why Is Trade Finance So Valuable?
Trade finance is more of a financing strategy than it is a loan; the rates are consistently lower than most loans, and this is considered “non-debt” capital.
It isn’t a loan, because it won’t accrue interest and require set payments over a specific period of time. No credit checks are required. You’re just getting money due to you earlier, and the fees are significantly lower than standard interested rates on loans.
With trade finance, you aren’t trapped waiting on payments from customers, which (depending on your business) can take a significant amount of time and comes at the risk that they pay late.
In many cases, receivables financing can be lightning-fast; you may even have the funds deposited in your account the same day.
Access to funding is a major challenge for most businesses, especially those who are required to incur significant costs to deliver products or services to their customers. This is often an ongoing challenge even for established businesses, so bank loans with set payment terms and high-interest rates aren’t always the ideal solution in these cases. The liquidity potential here is strong and can make an enormous difference for your cash flow. In addition, fast-growing businesses often cannot take out multiple loans at the same time, limiting their growth when they need additional capital the most.
It’s worth noting that trade finance can give you a distinct competitive edge, too. If you’re able to push payment terms out farther, giving your own customers more flexibility with their cash flow, it can give your business a leg up against the competition. Receivables financing makes this possible without you having to sacrifice your cash flow in the process.
Is Trade Finance Right for Me?
Trade financing may not be the right option for all businesses. It will be most useful when you don’t need significant capital to start your company and you already have sizable invoices that are simply outstanding. If you’re looking to scale more outside of what your invoices can offer you, looking at other financing options like business loans may be a good choice.
That being said, it’s a great choice for businesses whose cash flow is suffering due to the slow payment of invoices. If advanced payments would solve the majority of your problems, trade finance is an excellent solution, especially considering that it’s non-debt and won’t hit you with high-interest fees.
Want to learn more about how trade finance can benefit you? Click here to see how we can help.