Trade Finance Australia: Expert Guide & Options

If you have a one-off need for trade finance, a short-term business loan may be suitable. These are unsecured business loans and are generally arranged by the seller to help cover the up-front costs of sale, or to smooth over cash flow issues caused by the gap between sale and payment.

The finance is typically available for a term of between 1-12 months.

If you’re applying for a loan on the basis of a specific export contract, expect to be asked for a copy of your contract as part of the supporting documents for your loan application, (along with six or more months’ bank statements and trading records).

If you need ongoing access to trade finance, a trade line of credit is by far the most common option. It gives your business a revolving credit line that you can tap into as and when it’s needed. You can draw down on the credit line as often as needed (up to your credit limit) and replenish it by repaying the funds.

There are fees and interest costs, but most of the cost is only applied to funds actually drawn down.

You may even already have access to this kind of facility via your bank account's business overdraft, if offered by your provider.

A letter of credit or guarantee is a financial instrument that involves a bank or other financial institution providing a guarantee that payment will be made for a trade, or a supplier will be reimbursed, come what may.

For example, in order for a supplier to agree to making a shipment, the buyer might need a letter of credit from a financier that guarantees the invoice will be paid. If the buyer cannot pay the invoice, the financier would step in to make payment.

It can also work the other way where a seller provides a bank-backed financial guarantee to the buyer that the goods that they have ordered (and potentially paid for) will be delivered.

Banks (and sometimes insurers) offer these instruments to businesses in return for a fee.

Documentary collection is an arrangement usually used by established international trade partners who have built up a level of trust. It involves the exporter’s bank providing documents to the importer’s bank to prove that a shipment of goods has been dispatched and that the obligations under the contract have been fulfilled.

The buyer’s bank will then contact the buyer to let them know that they have proof of shipping, and request payment.

Depending on your agreement with the buyer, you may receive a cash payment in exchange for the documents, or a draft (also known as a ‘bill of exchange’ or ‘promissory note’) under which the buyer is obliged to pay after 30, 60 or 90 days.

It will not offer you the same level of protection as a letter of credit, because the buyer’s bank does not guarantee that you will receive payment. However, it enables you to retain control of the goods you have shipped until you receive payment.

Because of the lower level of risk to the bank, documentary collection is usually quicker, cheaper, and more easily available than a letter of credit.

A bill of exchange or ‘draft’ is like an endorsed cheque. It is a legal obligation for one party to pay another an agreed amount, at an agreed date in the future.

If the draft is drawn on a reputable bank it eliminates credit risk, by guaranteeing that you will receive the payment due to you when the draft falls due. In many cases you will have the option to sell a bill of exchange to a third party at a discounted rate – giving you up-front access to cash instead of having to wait for the payment date.

Bills of exchange can change hands multiple times, with the buyer (or their bank) having to pay the final owner of the bill when the payment falls due.

Trade credit insurance is a policy that protects you against the risk that your customers don’t pay their invoices. When you take out a trade credit insurance policy you pay a premium to a third party (an insurance company or export credit agency) and they agree to reimburse you if a customer defaults on their payment.

Trade credit insurance has two major advantages:

• Like any other insurance policy it provides you with protection against financial loss if something goes wrong, which is especially valuable if you are trading overseas or dealing with new customers and are unsure of their creditworthiness.
• It transforms your accounts receivable from an unsecured into a secured asset – which you can then use as collateral for a business loan. This is why trade credit insurance is considered a trade finance instrument rather than just an insurance policy.

Factoring, also known as ‘forfaiting’ or ‘invoice finance’, is a common form of business finance used by businesses in many sectors, not just international traders.

It is not debt finance: rather than borrowing from a lender, you sell the amounts due to you from your customers to a third party.

The way factoring works is that your finance company will advance you a percentage of the invoice amount – usually between 70% and 90% – and then collect payment from your customer when the invoice falls due. At that point they will deduct a percentage for their fee, then transfer the balance to you.

Factoring depends more on the creditworthiness of your customers than on the standing of your business, so it may be available even if you have not been trading for long or have a poor credit score.