Considering trade finance and asset finance for SMEs.
Trade finance
Trade finance can be a daunting concept for SMEs. However, any business large or small needs to come to grips with it in order to purchase goods from abroad. In its simplest form trade finance can be broken down into the following key stages:
- The exporter requires an importer to pay for goods prior to the goods being shipped
- The importer wants to ensure the goods have been shipped so asks the exporter for proof that the goods have been shipped
- Prior to shipment the exporter will require the importer to evidence that they have the funds available to pay for the goods
- The importer’s bank (or funder) will provide a letter of credit to the exporter (or the exporter's bank) providing for payment upon presentation of certain documents to show the goods have been shipped or arrived. The letter of credit is evidence that the importer has the ability to pay for the goods. The type of document used in the process depends on the nature of the transaction and how evidence of performance can be shown
- Once the letter of credit has been provided, the goods will be released to the importer
Trade finance assists by providing any business with funding to be able to provide the letter of credit to the exporter. In most cases the SME will not have the funding available so would be unable to purchase goods from abroad.
Asset finance
Asset finance does exactly what it says “on the tin”. It is finance provided by a funder to allow businesses to purchase commercial vehicles, plant and machinery to assist in their business. The finance can be by way of lease, hire purchase or refinance. SMEs rarely have enough free funds to invest in such purchases. Even if they do, most SMEs want to ensure there is sufficient monies available to assist with day-to-day cash flow. Asset finance is therefore ideal for any SME looking to grow, replace or update existing equipment or simply restructure their existing asset finance.
In brief, asset finance is:
- Flexible
- Predictable and stable
- An excellent means of raising funds
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