What is Trade and Debtor Finance?

  • Trade finance concerns international and national trade transactions – when a buyer purchases goods or services from a seller, the financial activities involved come under the umbrella term ‘trade finance’.
  • Trade finance includes such activities as lending, issuing letters of credit, factoring, export credit and insurance. Companies involved with trade finance include importers and exporters, banks and financiers, insurers and export credit agencies, as well as other service providers.
  • Trade finance is of vital importance to the global economy, with the WTO estimating that 80 to 90% of global trade is reliant on this method of financing, and is estimated to be worth around USD $10 trillion a year.
  • Debtor finance is a type of trade finance, and is an umbrella term used to describe a process to fund a business using its accounts receivable ledger as collateral.

Benefits of Trade Finance:

  • Promotes business growth: More working capital and better cash flow management allows business owners to keep in control of the day-to-day running costs of the business whilst growing a fulfilling larger orders that ordinarily wouldn’t be possible.
  • Higher profit margins: A finance facility can allow a company to buy in bulk or volume, up front (at reduced costs) and strengthens the relationship between buyers and sellers. This can be an opportunity to increase profit margins and EBITDA.
  • Greater efficiency and productivity: Working with other international players allows business owners to diversify their supplier network which increases competition and drives efficiency in markets and supply chains.
  • Balance Sheet Efficiency: Financing a transaction allows a company to “free-up” their balance sheet for other purposes.
  • Reduces bankruptcy risks: Late payments from debtors, bad debts, excess stock and demanding creditors can quickly cause the crippling of a trading company, which is reliant on effective cash management in order to stay alive. External financing or revolving credit facilities can ease this pressure and allow a company to avoid these risks.