Understanding trade finance and how it can help your business to make more sales and save money.
In a time of tightening margins and fluctuating expectations, business owners need to be able to maximise any potential streams of revenue that they can find.
This continuous inflow of cash flow gives them the working capital they need to allow them to operate more securely in the knowledge that they are able to meet all of their overheads and liabilities.
The more revenue your business has to work with, the more likely your business is to thrive. This is especially true if you can manage to increase revenue streams without increasing your overheads at the same time.
Accomplishing this requires a level of research and an open mind, as there may be undiscovered pathways that could unlock increased revenue potential within your business. One such pathway that you might not necessarily have considered yet is that of a trade finance solution.
Let’s explore what trade finance is, and how it might potentially increase revenue and improve profit margins for your small business below.
Addressing the cash flow gap
Typically, trade finance, a type of supply chain finance, is a solution to bridging a cash flow gap issue within your business. This is the gap between you paying
for materials and receiving payment for selling your product or service.
This gap can cause a financial conundrum: you have to buy from your suppliers to make money, however you need money to buy from your suppliers.
But with trade financing, you can pay your suppliers, for both domestic and international trade, upfront without having to dip into your cash reserves. This gives you the ability to produce your product or service, when you don’t have sufficient working capital to do so, or to preserve the working capital you do have.
Keeping the supply chain moving
The role of trade finance providers is to act as an intermediary between you and your supplier. You apply for a Trade Finance Facility and a facility limit is established for you to utlise. The Trade Finance provider pay the supplier for the goods that you need. This preserves the supply chain of the materials that you need for your business, allowing you to invest in other areas of your business to assist growth.
Depending on the specifics of your agreement, you repay the trade finance provider, ideally as more revenue becomes available within your business. You can do this easily in conjunction with an invoice financing arrangement, as explained in our earlier blog post “How invoice finance and trade finance work together”.
Trade finance can be especially apt for companies with predictable seasonal demand, as owners can be more confident in periods of increased sales approaching. And because trade finance works alongside invoice finance, the more demand you have, the greater your line of credit.
Full steam ahead
When used appropriately, trade finance may allow for three things, all of which have the potential to increase revenue within your business.
- There’s no need to decrease production.
Firstly, you can continue to make and sell the things that you make and sell, in situations where you might otherwise have needed to decrease production due to lack of cash and resources.
The result is that you may now consistently have an adequate amount of units available, so if you enter into a period of high demand, you’ll be able to meet that demand adequately and maximise the available revenue.
- Frees up working capital.
Secondly, it frees up the cash that would otherwise have gone towards paying your suppliers upfront. This may be the difference between operating at full capacity or not at all.
You can feel more confident that you have the cash at hand to cover utilities, wages, and other overheads. Keeping your business open and well staffed in order to expand your customer base is a critical component to increasing revenue for many businesses.
- Improves local and global trade relationships.
Finally it preserves a healthy working relationship with your suppliers, as they are being paid promptly and securely, allowing both of you to operate as effectively as possible.
A healthy working relationship usually garners the best possible terms of trade, meaning that you may be able to access discounts, as well as the best possible pricing and quality from your suppliers, resulting in a potentially more satisfied customer base and therefore an increase in revenue.
Operating a business in these times of increased volatility requires a keen eye and clear understanding of all of the available tools for any business owner. If you’re seeking a solution to address a cash flow gap and keep your supply chains open and healthy, perhaps a trade finance service provider, such as Earlypay, may provide you with the options you need. With the right infrastructure in place you’ll be able to maximise your potential to increase revenue and thrive moving into the future.
For more information on how Earlypay can help your business with trade and invoice financing arrangements, you can call our friendly team on 1300 760 205 or visit our sign-up form.