Trade Finance - Q & A

Trade finance is a funding solution that covers the cost of supplier payments, local or overseas and gives a business time to receive and on-sell goods before repaying the facility. In practice, it sits in the gap between paying your supplier and collecting from your customer. It is not a traditional loan. It is working capital timed to the trade cycle. Typical repayment terms run up to 120 days. Trade finance is used by importers, wholesalers, manufacturers, and distributors who need to fund stock purchases before revenue arrives.

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The problem trade finance solves

Winning new orders at good margins should feel like success. But when your supplier wants payment upfront  or within 30 days and your customers take 60 days to pay, the gap between those two facts can quietly choke a business.

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The business isn't failing. The pipeline is strong. The product is good. The problem is timing.

Cash leaves before it arrives. The supplier's payment terms become the ceiling on how much you can order. And the ceiling on orders becomes the ceiling on growth.

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Most advice in this situation defaults to 'get your invoices paid faster.' That's not always realistic when your customers are large corporates or multinationals who set the terms. What actually solves this is trade finance, funding that sits between paying your supplier and getting paid by your customer.

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How trade finance works

Stage 1 - Supplier payment

When you need to purchase stock or goods, the lender pays your supplier directly (or reimburses you for payments already made). You receive the goods and can begin selling.

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Stage 2 - Repayment

You repay the lender when your customers pay you, typically within 90 to 120 days of the drawdown. The facility matches the cash flow cycle of the trade, rather than creating a fixed monthly repayment obligation. Each drawdown is tied to a specific purchase order or trade transaction. The facility can be used repeatedly as new orders arise.

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Who uses trade finance?

Trade finance suits businesses that import goods from overseas suppliers or  purchase stock locally from suppliers on short payment terms, need to pay a deposit in advance before goods are manufactured or shipped, have seasonal purchasing requirements, buying stock months before peak demand, or are growing faster than their cash flow can fund.

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It is particularly common in industries including wholesale distribution, food and beverage, retail supply, building materials, manufacturing inputs, and consumer goods.

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Minimum turnover is typically $3 million, business must be profitable last two years and no tax arrears, or is on a manageable payment plan.

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Trade finance vs receivables finance, which one?

These are not competing products. Many businesses use both.

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Receivables finance operates at the back end of the trade cycle, unlocking cash from invoices already raised to customers who owe you money.

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Trade finance operates at the front end, funding the supplier payment before goods are received and before invoices are raised.

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For businesses that buy and sell goods on terms, combining both products creates a fully funded trade cycle: trade finance covers the purchase, receivables finance accelerates collection from customers. Together they close the cash flow gap at both ends.

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Real scenario

A client was getting squeezed from both ends. A supplier in Asia had shortened payment terms from 60 to 30 days following their own cash flow pressures. Freight costs were climbing. And his retail customers, large national chains, were still paying on 90-day terms.

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When Pfitz looked at his financial position, the debtor ledger was clean, well-aged, and solid. His customers were paying. The business wasn't in trouble. It was a timing problem.

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We structured a trade finance facility that paid his overseas supplier directly on each purchase order. He received goods, delivered to customers, raised invoices, and repaid the trade finance within 90 days as customer payments cleared. The business stopped being constrained by the supplier's terms and started taking on larger orders.

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FAQ - Trade Finance

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What is the difference between trade finance and a business loan?

A business loan provides a fixed sum repaid in regular instalments. Trade finance is tied to specific trade transactions, each drawdown is connected to a purchase order, and repayment is aligned with the receipt of customer payment. The facility moves with the trade cycle rather than running on a fixed schedule.

 

Can I use trade finance for local supplier payments, not just imports?

Yes. Trade finance can cover domestic supplier payments as well as international ones. It is not limited to import or export transactions, though it is particularly common in import-heavy businesses.

 

What documentation does a lender need?

After the facility is approved and established, lenders typically require a copy of the purchase orders, supplier invoices, shipping documents and letters of credit may also be required. The documentation requirement varies by lender and transaction size.

 

How quickly can I draw on a trade finance facility?

Once established, drawdowns can typically be made within 24 to 48 hours of submitting a purchase order. Setting up a new facility usually takes two to four weeks.

 

What is a letter of credit?

A letter of credit (LC) is a bank guarantee that payment will be made to the supplier once agreed conditions are met, such as delivery of goods or provision of shipping documents. LCs are common in international trade and provide security for both parties. Not all trade finance requires an LC; open account structures are also available, especially by non-bank trade finance specialist lenders.

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Does my business need to be importing or exporting to qualify?

No. Domestic trade finance is available for businesses purchasing from local suppliers on terms that don't align with their customer payment cycles. The key requirement is a clear, documentable trade transaction.