Trade or Transaction Finance is “through finance” from supplier through the client to customers who require goods or services. It is “off-balance-sheet” finance, which does not affect existing bank facilities. The normal simple scenario is that a lender buys and sells to the client. Upon sale of the product the sales invoice is assigned to a lender and, from proceeds, the lender recovers their position and pays the profit to the client.
A trade finance lenders prime consideration is always to know how they are going to get their money back. When they know that, the lender can buy goods or services for the client that they cannot finance for themselves. Other than that most trade finance lenders have few rules.
Finance Categories
Such finance is used for imports, exports, goods both bought and sold in UK (frequently after manufacture), and even if the goods never touch the UK or Ireland.
A substantial client category is businesses that cannot get sufficient credit themselves from their UK suppliers. Some are new businesses but most are restarts, recent starts, CVAs or “rebuilds”. Lenders frequently get their money back from the client’s factoring company. However, not all factoring companies (including the UK bank owned factors) make it practical to work with them.
Goods do not always have to be pre-sold.
Trade finance lenders often buy for a manufacturer or assembly operation.
Trade finance can be used where a client both supplies and fits, even if the sales contract is “contractual”. .
Because of a lenders credibility and substantial covenant the most frequent method of purchase is on “open account” using a Supplier Undertaking (SU), either from UK or overseas. This is much more economical for the client than the use of LCs, but it is also much more secure for all parties, including even the supplier.
If the SU cannot be used, a lender will import using “DP”, “DA”, or a letter of credit, each case being separately determined.
For clients who sell on credit lenders have several formats for recovering their funds from their factoring company.