Definition
Trade finance is funding that covers the gap between paying a supplier for goods and receiving payment from selling them. Usually the funder settles with the overseas or local supplier around shipment, and the business pays the funder back over a set window once it has sold the stock. It is used by importers, wholesalers and exporters with regular purchasing cycles, and is usually a revolving facility.
Trade finance exists for businesses whose money is tied up in goods on the way.
How it works
Place an order and the funder settles the invoice, commonly on receipt of shipping papers, booking that amount against your limit. Each drawing has its own term, roughly matching shipping and selling time. At the end of that period you clear the drawing, ideally from sales, freeing the limit for the next order.
Costs
Expect a margin or interest on each drawing, transaction fees, facility fees and sometimes currency charges. On many small orders, transaction fees can add up.
Pairing with invoice finance
Many distributors use trade finance on the buying side and invoice finance on the selling side to cover the full cycle. Our trade finance review explains how. For exporters, Export Finance Australia is worth checking. To explore a facility, make one enquiry.
Common questions
Can trade finance pay overseas suppliers?
Many facilities can pay suppliers overseas and in their currency. Ask how currency conversion is handled.
Is there government support for exporters?
Export Finance Australia, a Commonwealth agency, can back some exporters where commercial finance falls short.
Sources and further reading