Trade finance for importers

by David Irish | January 9, 2023

Trade-financing

Managing their cash flow cycle is a particular challenge for importers as the purchasing cash flow lead-time is generally longer than purchasing locally. In most cases imported goods need to be paid for before they arrive; or even before they are shipped from the source country. Trade finance refers to the financial instruments and services that provide a solution to reducing the gap between supplier payments and customer receipts. Trade finance comes in many forms including:

  • Foreign Currency Overdrafts
  • Import Letters of Credit
  • Trade Loans
  • Structured Trade Finance
  • Supply Chain Finance
  • Import Asset Based Finance
  • Payment Guarantees
In this article I will be focusing on Trade Loans (touching on Structured Trade Finance) and Supply Chain Finance.

trade loans

Trade loans are typically provided by banks or other financial institutions. They can be issued as negotiable bills of exchange, meaning the financier is able to discount them at another financial institution. Generally, the banks have a lower risk profile and associated costs than non-bank financial institutions. The key element of a trade loan facility is that a specific trade loan is entered into for each shipment of goods being imported. The most common payment terms required by foreign suppliers is payment on sight of the shipping documents, specifically the bill of lading. Accordingly, most trade loans are issued on provision of shipping documents with the actual goods being imported serving as the primary security for the loan. Most trade loans are offered for up to 180 days, but longer terms may be offered depending on the credit standing of the importer.

Some of the key characteristics and benefits of trade loans are:

1. They are generally uncommitted facilities. i.e. unlike overdraft financing a non-utilisation fee does not apply.
2. There can be a high level of operational intervention by the financier. This includes:

  • The financier may require an assessment of each supplier relationship such as: how long the importer has been purchasing from the supplier and the frequency of quality issues.
  • The financier pays the supplier directly, requiring full supporting documentation for each loan.
  • Pre-shipment payments such as deposits on order placement, or 100% payment prior to shipment may need to be evaluated on case-by-case basis.

3. Because of this level of operational intervention, trade loans are considered less risky than overdraft finance which is always securitized lending meaning tangible security such as covering bonds over property are required.

Collateral requirements for trade loans might include:

  • Cession of debtors
  • Cession of short-term insurance policies – fire and theft of stock
  • Cession of marine in-transit cargo – if INCO terms are FOB
  • General Notarial Bond (GNB) – this will depend on the movement of stock and if stock goes into a warehouse. If the stock goes directly to a distribution centre (DC) of an ultimate buyer, then there is no point in taking a GNB
  • Limited guarantee / surety by the shareholders
A slight variation on trade loans is structured trade finance where the imported stock is actually held in custody by the financier via a third party with stock only being released once it has been sold to the ultimate buyer.

supply chain finance

Supply chain finance is a form of trade finance where the financier predominantly looks to the credit worthiness of the ultimate buyer of the goods. This would typically be a large corporate such as Pick n Pay or Shoprite. Supply chain finance emerged because of the realisation that small and medium size enterprises (SME) are constrained in their growth and competitiveness due to challenges in raising finance off their own balance sheets.

However, supply chain finance can also assist a buyer to optimize the working capital of their supply chain as they can agree extended payment terms with a supplier and in return the supplier is able to discount the associated receivable via the supply chain finance scheme based on the buyer’s credit worthiness.

Not only does this enable the supplier to access funding they would not be able to obtain on their own, but also should be at a lower cost since the corporate would typically have a more favourable credit rating than the supplier.

Furthermore, having access to the program offered by the buyer allows the supplier to be able to finance larger orders and/or hold stock for the buyer. This all leads to growth potential for the supplier and supply chain resilience for the buyer.

Invoices are discounted on a “without recourse“ basis once they have been submitted by the supplier and only after having been approved by the buyer. This is typically administered via an approved online platform provider that is integrated with the buyer’s procurement/accounting system and is accessible by the supplier in order to submit invoices for discounting and also by the financier in order to validate and approve funding.

Supply chain finance is an ingenious solution for both buyers and their suppliers. However, the problem is that corporate buyers, platform providers and banks do not appear to be marketing these programs enough. One banker I engaged with explained they come across many struggling SME’s who supply corporate buyers but don’t know about the schemes available to them.

Trade loans and supply chain finance are just two examples of trade finance available to importers and there are many variations in the offerings by the various financial institutions. It is advisable that importers undertake thorough research into the options available in order to find the solution that adequately satisfies their requirements.

If you need assistance with identifying the appropriate trade finance for your business, contact Dale Petersen at
021 819 7802 or at dpetersen@wauko.com to find out how we can partner with you to solve your cash flow challenges.

Note: Special thanks to the trade finance divisions of ABSA, Investec and Nedbank for their contributions to this article.

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