A new (old) way of financing – trade finance

Finance (Photo credit: Tax Credits)

When I was in secondary school, I took a subject called Business Organisations (or biz org as we called it). It was a bit of law, general business and finance all rolled into one. At that time a lot of it did not make sense, but when I started to work I encountered many of the things I had learned about – shareholders, annual general meeting, debt financing and so on.

I recently read an article in CIMA’s Financial Management  (Sept 2012, pp. 32-34) on a topic which I have never encountered in my working life in Ireland/UK – trade finance. I do remember learning about it biz org though – not bad after 25 years almost. So what is trade finance?  It is simply using the materials/supplies as a security for finance.  It works as follows.

• a company needs to buy materials to complete a sales order, but does not have the free cash to pay.
• a trade finance company (or bank) agrees to buy the goods, and issues a letter of credit to guarantee the payment to the supplier.
• The customers order (often from a large well-known business) is security for the trade finance provider.

According to the article, trade finance is becoming more popular as many firms are finding it difficult to obtain or maintain a bank overdraft. You can read the full article here