36 BE | Summer 2014-15 Summer 2014-15 | BE 37

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Trade finance in the globalised business landscapeBy Ben Lacey

As the global market moves away from tradition, becoming more and more accessible to businesses of all sizes, so too grows the opportunity for those businesses to expand, reduce costs and diversify.

New supply sources in foreign markets provide for the opportunity to source materials, completed inventory, machinery and services at a lower cost. Similarly, new markets open the door to new and diversified customers, distribution channels and revenue sources with higher margins.

While the increasingly globalised world of business provides the potential for these outcomes, the issue of funding the cash cycle still remains.

The problem of cash flow and risk

Cash flow management and risk mitigation is central to the effective management of a business’ growth. as a business expands globally, and increases its exposure in new markets, the cash flow and risk concerns increasingly require close monitoring.

For example, a business that is experiencing a steep rise in sales has an increased cost of goods, and needs to source inventory to service client demand. This requires working capital to pay for goods before the sale is made and the final product shipped. If that capital is to come from day-to-day cash flow, the business risks running out of cash to service its daily operations and payables as they fall due.

Cash flow management for a small business works in the same way that people use credit cards and personal loans to fund daily purchases; that is, in a way that ensures they don’t need an outflow of funds from their savings, and they can repay what they owe in instalments or a lump sum.

businesses need a cycle of operating capital to make sure they’re not overdrawn and can reconcile their debts once their client has paid the invoice for delivered goods or services.

The risk is that cash flow can be further constrained when dealing in foreign currencies and/or with international suppliers and clients. This is where the employment of an international trade finance structure is important.

The international trade finance solution

International trade finance is a range of short-term ‘credit instruments and facilities’ that are structured to match the trade cycle of the import or export program of a global business.

It exists specifically to assist with risk mitigation, currency management and the freeing up of cash flow required to service the day-to-day running of the business. Trade finance can even be issued in the same currency as the supplier’s terms and/or the buyer’s payment.

Some businesses may rely upon traditional bank funding such as overdrafts and term lending for the purpose of international trade. However, as those facilities are designed for domestic purposes, they can have unnecessary negative impacts upon a business’ balance sheet (and further so if the business has financial covenants and ratio reporting hurdles to meet like gearing ratios, cash coverage ratios, interest coverage and net cash after operations (NCao)). It’s important to research all your options with a trade specialist before proceeding, as an ill-informed choice could impact your business’ growth potential.

To add further benefit, as trade finance is provided against a specific import or export transaction, it is likely to be a cheaper source of funding than an overdraft or loan because of its short term and self-liquidating nature.

Want to see how trade finance works?

Consider this: you’re an importer of widgets from a Chinese manufacturer. You place an order for a $US75,000 container of merchandise to wholesale locally. The manufacturer asks for a 25 per cent pre-payment deposit to commence its four-week manufacturing process, with the remaining 75 per cent due upon loading on the ship at Shanghai port.

You agree, and the ship then takes about 25 days to land at your brisbane port. You introduce your new widgets into the warehouse as inventory, from which you then have an average period of 30 days until they’re converted into a sale and invoiced to the end buyer. You provide that buyer with payment terms of up to 45 days.

For this one shipment, your business has $US75,000 in cash outflow tied up for around 128 days. a trade finance facility will provide you with that cash flow back into the business from day one, to be employed in your day-to-day activities.

Consider the roll-on effect if you had one shipment under a similar agreement per week – the capital employed in your trade cycle becomes substantial (an additional consideration is that 25 per cent deposit being at risk until the product is loaded; an instrument typically used to mitigate this risk is a trade finance solution called a ‘letter of credit’, which is offered to the manufacturer in place of the deposit).

The positive cash flow effect of a well-structured trade finance facility can be like giving an internationally-exposed business a blood transfusion. Implemented well, it can speed up payment, address risk, reduce costs and help move goods faster. Sounds pretty good right?

It does, but how do I know if ‘going global’ is right for my business?

• Does your business source materials or inventory from overseas?• Does your business sell products or services in overseas

markets?• are you a domestic trading business that is considering

international opportunities?• Has your business recently secured new contracts that will place

you into the 'yes’ category for questions one or two?

If you answered 'yes' to one or more of the above questions, you may benefit from a review of your trade cycle, or new market entry, by banking specialists in trade. Early engagement is ideal so as to address the risks and cash flow needs of your business before issues or constrictions occur.

Ben Lacey is Suncorp Bank’s Manager of International Trade Finance.