Trade loans are flexible, short-term borrowing facilities, linked to specific import or export transactions.
They are available for firms regardless of the method they use to trade, whether open account, collections or documentary credit basis. Trade loans help fund trade transactions throughout a firm’s trading cycle, improving its cashflow.
Trade loans work as fully revolving credit facilities, which help fund a business between the time it has to pay for the purchased goods, and the time when the firm receives the funds from the sale of those goods. Once the facility is agreed and put in place, the borrower presents his drawdown documentation. Any drawdown documentation is agreed in advance and stipulated in the facility agreement. This normally includes invoices and transport documents.
Depending on the type of agreement, the lender may or may not have control over the transport documents.
Trade loans are an important and well-established trade finance technique. Particularly suited to wholesalers and manufacturers, they can be used for regular or one-off purchases of goods and raw materials.
There are three main costs that need to be considered:
The timeframe for arranging a trade loan will vary, depending on the complexity of the deal. Typically it takes between one and four weeks.
The right finance for your business section gives examples of financial structures that are suitable for different trading types and sizes of business.
There are a range of trade services and products that are offered by banks and other financial services providers. Trade loans are a well-established form of plugging the gap in a trade cycle, but there are other alternatives, such as cashflow finance/invoice factoring and business overdrafts.
Import letters of credit and documentary collections can be instrumental in helping firms manage their trade cycle, particularly when trading abroad.