Trade finance loan

If you’re a wholesaler, distributor or importer, a trade finance loan can give you the cash you need to buy inventory or stock from a supplier, in order to fulfil an order. It’s a form of working capital finance. It falls under the broader banner of trade finance.

If you have domestic customers, or some in South Africa and some abroad – and if you’re importing or exporting – a trade finance loan (trade loan) could help you handle overseas transactions and costs.

Put simply, a trade finance loan can give you the cash you need to buy inventory or stock from a supplier, in order to fulfil an order. In this narrow definition of trade finance, it’s another form of working capital finance and has a lot in common with purchase order finance and supplier finance.

Let’s say you have a confirmed purchase order from a customer and you want to either import stock or inventory, or export products for resale. This is the point at which you’d talk to a trade finance lender. They would look at you favourably if both your customer and supplier were established businesses. Their loan would pay your supplier (in this case the exporter) before you (the importer) receive the goods. 

Goods can then be shipped to you more quickly so that you can fulfil your order. Your trade finance lender in other words acts as a third party to mitigate payment risk and supply risk.

A trade finance loan (trade loan) works like this: 

• Your supplier invoices the trade finance lender for the shipped goods
• Your customer then pays the trade finance lender
• Finally the lender pays you the profits, minus fees.

The loan helps you close the payment gap at the beginning of your sales cycle. It can also work alongside any existing finance your business might have, like invoice factoring or asset finance.

Defining terms:

• Some people refer to a trade finance loan as ‘trade finance’. For us, trade finance as a catch-all term for a much broader range of products and instruments designed for businesses who trade internationally. These include trade finance loans (as described here), invoice factoring, supplier finance and export finance. 
• Because trade finance loans (or ‘trade finance’ if you are using the narrow definition) are based on purchase orders, they are sometimes referred to as purchase order finance or import finance. 
• It’s easy to confuse a trade finance loan (or ‘trade finance’ if you are using the narrow definition) with supplier finance (or supply chain finance), because a trade finance loan helps you fund the beginning of your supply chain. However, supplier finance is actually a different type of business lending that buyers offer to their suppliers.