US and China flags with currency
Jan 15, 2021

What is Trade Finance?

Trade finance is the facilitation of import and export activities and all associated international trade transactions.

Generally, all domestic and international trades sell on payment terms allowing buyers to delay settlement of invoices. This works best for buyers as they can work on generating revenues before invoices fall due.

For example, a US shoe store orders a container of shoes from a seller in China. The consignment will take about 45 days before reaching the buyer's warehouse, and the buyer has a 60-day payment term after receiving the goods.

The Chinese seller will, therefore, receive payment after 105 days!

For a large supplier, waiting for that long does not cause any issue as they have a more streamlined cash-flow or easily access liquidity from other sources.

On the contrary, small and medium scale suppliers have short cash cycle and struggle to withstand long payment terms.

Therefore, Lockstep chips in to provide trade finance to these suppliers and stabilize their cash flow.

Risks involved in an international trade

There are two players to an international trade transaction; an exporter aiming to get paid for their products as soon as possible, and an importer who seeks to get the correct quantity and quality of goods they ordered.

The two players are most likely not familiar due to their cross border transactions. They have to deal with the following risks when entering a trade agreement:

  • Payment risk – will the importer get the correct goods ordered and pay the exporter the full amount on time?
  • Country risk – foreign trading faces various risks, such as exchange rate risk, economic risks, and political instabilities.
  • Corporate risk – are challenges associated with the exporter or importer, including quality of goods, credit rating, or history of non-payment.

How trade finance benefit businesses

The growth of small and medium-sized businesses heavily depend on proper cash management and working capital. Trade finance helps unlock money tied to existing stock or receivables or through credit facilities secured by the business' trade cycles. Therefore, business operations continue as usual because trade finance reduces payment gaps and improves supply chain relationships. Key benefits of trade finance include:

  1. Access to short to medium-term working capital secured by the underlying products or services being imported or exported.
  2. You can request higher volumes of stock as a producer or place larger orders as a buyer using trade finance and benefit from economies of scale and bulk discounts.
  3. Strengthening buyer and seller relationships, improving the trust between the two players, and increase profit margins.
  4. Supply chain finance removes cash constraints or liquidity gaps through early payments to suppliers.

The main concern for small and medium-sized businesses is that their balance sheet may not attract trade financing. However, trade finance focuses on the trade and not the borrower, and you can use trade finance for large volumes of trade even with a weak balance sheet.

Trade finance is also considered a risk mitigation strategy and assists suppliers in avoiding late payments from debtors, bad debts, pressure from creditors, and excess stock.

Trade finance instruments

Trade finance is an umbrella covering a variety of financial instruments associated with international trades. These instruments include:

Purchase order finance  

PO financing is a pre-shipment solution advancing a certain percentage of the purchase order (PO), usually between 30% and 70%, to help the supplier finance the processes to deliver the finished product. Such functions may include working capital, production costs, and buying raw materials.

Supply chain finance

Supply chain financing is the most common source of financing in international trade. Supply chain finance offers liquidity by unlocking tied funds within the supply chain tiers and adding efficiency for import and export activities.

There are two categories of supply chain finance offered by trade finance:

  • Supplier finance programs – Buyer payment terms (30-day, 60-day, 90-day due dates) may not favor small-sized suppliers who may opt to be paid earlier by a financing company at a cost or wait for the due dates for full payment.

The supplier finance program helps both the supplier and the buyer. The supplier receives funds tied by payment terms to finance their working capital while the buyer can maximize their payment terms, generating profit from sales before paying the supplier.

  • Buyer finance programs – The financing company advances credit facility to the buyer to help pay the supplier and facilitate import processes. This way, the buyer can import larger volumes of goods that could not be possible without financing, and the supplier gets paid earlier.

Invoice discounting

Invoice discounting occurs when the seller opts to be paid before invoice maturity by transferring the invoice's ownership to a financing company and receiving a discounted value of the invoice. The buyer will, therefore, owe to the financing company and not the seller.

Receivable financing (factoring)

Invoices are legally enforceable documents that a seller can use to acquire funding when experiencing cash flow issues. The financing company can advance part of the invoice amount to the seller immediately and the rest when the invoice is due, minus the factoring fee.

This way, the buyer gets the product immediately and pays on the due date while the seller receives cash to help run the business. The buyer-seller trust is safeguarded, and their business relationship improved over the future.

Letter of credit

A letter of credit (LC) is the oldest trading finance instrument issued by the importer’s bank to the exporter or exporter’s bank pledging to make payment for the exported product at a specified time frame provided it meets specific standards.

Therefore, the exporter is owed by the bank and not the importer reducing the corporate risk as banks are a lower risk than the importing company.

A confirming bank will check on the LC provided by the importer's bank against export documents provided by the exporter and confirm that the LC standards have been met. The confirming bank then pays the exporter the full amount minus a fee.

Lockstep sustainable supply chain finance

Export financing

As an exporter, waiting until your buyer receives goods and resold them can be costly. For instance, our Chinese supplier exporting shoes to the US and waiting for 105 days to get paid, if he receives two more orders with the same terms, he may not manage to facilitate the production.

Lockstep is offering trade finance solutions that enable you to trade globally following the Export Administration Regulations’ (EAR) procedures and policies while improving your cash flows.

We are here to bridge the gap between when you ship your goods and receive payment for the goods. Further, we are rewarding your green shipping choices! We audit how your shipping practices reduce costs and wastes and give a Green Score that translates to more benefits.

Our innovative tracking and analytics tools enable you to stay on top of your shipments. We help you monitor your cargo and analyze how your inventory is building up, hence avoiding sustainability problems or bottlenecks. We aim to help you save on costs while maintaining sustainable shipping practices.

Import financing

Our buyer financing program does not just finance your imports, we also offer deal structuring advisory services that will ensure you end up with the best payment terms and limit your risks.

Coupled with our array of trade funding solutions, such as letters of credit, Lockstep import financing offers the lowest-risk, most favorable payment terms and highest-profit trade finance option for our clients. Learn how you can maximize your benefits from our buyer financing program.

Core competencies

Our depth of expertise in supply chain financing services we provide is best exemplified by export financing, one of our core competencies.

We offer world-class export financing solutions and are committed to helping you ship your products out to your customers as soon as possible. We learn your shipping needs and behaviors and try to eliminate costly and wasteful practices to make you a highly trusted "green" shipping supplier.

We focus on making successful shipping for our clients who rely on us right from applying for funding, through tracking, analytics to making sure their customers receive the products at their stores.

Our directors possess over 20 years of combined experience as underwriters and analysts. This expertise forms the foundation for our unparalleled sustainable supply chain financing. You can trust our Lockstep team's capabilities that have successfully fulfilled dreams for most exporters and aim to incentivize sustainable supply practices and make our planet greener.

Contact us to discuss your sustainable shipping today. Our team will offer you extraordinary supply chain solutions that will add value to your business.

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