How trade finance can help your business expand globally

Expanding into international markets comes with exciting opportunities—and big upfront costs. Trade finance can be the key to covering these costs, allowing you to fund large orders, unlock better supplier terms, and meet growing global demand without tying up working capital. Read on and learn more about this type of business loan.

What is trade finance?

Trade financing helps businesses cover the upfront cost of goods, whether locally or internationally, repaid over 2–9 months with either a flat fee or interest on the loan. Similar to other business loans, there’s usually a preset lending limit.

Many SMEs use trade finance loans for buying stock or materials in bulk, which allows them to spread their costs over time while still being able to benefit from discounts and lower shipping per unit. Lenders often monitor business performance, adjusting limits based on how the business is doing.

How trade finance works

The trade financing process typically goes as follows:

1. You place an order with the supplier. This would typically be a large purchase—perhaps to take advantage of bulk pricing or meet rising demand.
2. A trade finance provider pays the supplier. Instead of paying upfront, the lender pay the supplier directly—either partially or in full—on your behalf.
3. The supplier ships the goods. Depending on the agreement, the lender may take temporary ownership of the stock until it arrives.
4. You sell the goods or use them in production, generating revenue in the process.
5. You repay the lender. This repayment includes the original cost plus any fees or interest.

Types of trade finance

There are several forms of trade finance that businesses use depending on their specific needs, risk levels, and trading partners, including:

Letters of credit

A letter of credit (LC) is issued by the financier to mitigate the risks for both parties, the importer and the exporter. It guarantees the payment of the goods will be fulfilled by the buyer upon verification of certain documents.

In a nutshell, this is how it works: first, the buyer requests their issuing bank to open an LC in favour of the seller. Then, the issuing bank sends the LC to the nominated bank, which then sends it over to the seller. The seller ships the goods and submits the required documents to the nominated bank, which then reviews the documents, confirms everything is compliant with the LC, forwards it to the issuing bank, and requests payment.

The issuing bank processes the payment on behalf of the seller and deducts the amount from the importer's account. Lastly, the issuing bank releases the shipping documents to the buyer, allowing them to claim the goods from the carrier and complete customs clearance.

Export and import finance

Export finance and import finance both work as lines of credit. Exporters can use a line of credit to produce goods for sale while waiting for customer payments to come through, while importers can use it to purchase goods and use outstanding invoices as collateral.

Bank guarantee

Bank guarantees are commonly used in international trade to build trust between unfamiliar parties, and are particularly useful for large or high-risk transactions where one party needs assurance before proceeding. In short, a bank guarantee is a promise from a financial institution that a buyer’s obligations will be met; and if the buyer fails to pay or perform as agreed, the bank steps in and covers the loss.

Common uses for trade finance

Trade finance is a very specific type of business funding, designed for particular needs, such as:

• Lowering the cost of stock, inventory and/or materials
• Access higher lending limits.
• Maintaining reserves of cash in the bank.

The pros and cons of trade finance

It's important to carefully consider the benefits of trade finance, as well as the drawbacks, to decide if this is the right solution for your business:

The pros

• Allows businesses to save by buying stock in bulk. Suppliers often offer discounts for larger orders; plus, bulk purchases can protect you against price fluctuations, since you can lock in a favourable rate, as well as supply chain disruptions.
• Often provides the ability to borrow more than typical business loans. With trade finance, inventory or receivables are often used as collateral. This lowers the risk for lenders and makes it more likely that they'll be willing to lend more than other types of business financing.
• Keep cash free for other expenses. Both inventory and material are significant expenses. If you can get financing to cover them, you can improve cash flow and free up capital to invest in growth and go after new opportunities.

The cons

• Requires more paperwork than term loans. From exporters to importers, banks, and more, there are several parties involved in trade finance, which often results in more required documentation. Not only is this more work overall, but if there are any delays with paperwork, you may end up dealing with supply chain disruptions.
• Funds are strictly for stock and material purchases. You can't use trade finance freely—it is strictly for purchasing inventory or raw materials or paying suppliers. If you need a more flexible loan, trade finance may not be right for your business (or perhaps you want to get another loan, like a business line of credit, alongside trade finance).
• Lending limits may drop if business performance dips. Lenders regularly reassess risk by checking details like your revenue, profitability, and cash flow movements. If these numbers decline, your lending limit might drop or even get suspended, creating a sudden funding gap.

What to think about before getting trade finance

Trade finance can be a smart finance solution—but it's not one-size-fits-all. Before moving forward with it, ask yourself:

• Can you save significantly by buying in bulk?
• Will you sell or use the stock quickly?
• Are you okay with sharing more comprehensive details on your business?
• Will freeing up cash help grow your business?

How to apply for trade finance

If after considering the pros and cons, and answering the questions listed before, you believe trade finance is the right solution for your business, we can help with the application process. Simply tell us a bit about your business loan needs and immediately receive quotes from over 90 bank and non-bank lenders. Confirm your quote and we handle your business loan approval so you can focus on what matters—your business.