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• 24 Mar

  Using Factoring To Repay Trade Finance

  Using Factoring to Settle Trade Finance: A Comprehensive Guide for UK Companies

  In the world of international trade, UK-based companies often grapple with the challenge of managing their cash flow efficiently. One of the pivotal aspects of this challenge is ensuring timely payments to overseas suppliers while maintaining a healthy cash reserve for other business operations.

  This is where the synergy between trade finance and factoring comes into play, offering a robust solution to extend credit periods and streamline financial operations.

  Customers Are Unaware Of This Option To Extend Their Credit Period

  Not all importers are aware that you can use factoring facilities to repay a trade finance facility.

  Trade finance facilities can be used by importers to pay overseas suppliers for goods that they are importing into the UK. It can also be used for purchases of products from within the UK, in which case it works in a very similar fashion.

  There are a number of different options as to how the facility can be structured, but one particularly attractive example is where a trade finance facility is paired with factoring finance, such that the latter repays the former. This can significantly extend the period of credit that you enjoy.

  How Factoring Can Repay Trade Finance

  This is how you can use factoring to pay off trade finance. How this works in practice, is as follows. You place an order for goods with your overseas supplier. The trade finance company extends a line of credit to you which guarantees payment to your supplier, providing certain pre-agreed conditions are met. For example, these conditions could include providing documentary evidence that the goods have been shipped.

  The Symbiotic Relationship

  Here's a scenario to illustrate the interplay between trade finance and factoring:

  • A UK company orders goods from an overseas supplier.
  • A trade finance provider offers a credit line to the UK company, assuring the overseas supplier of payment upon meeting specific conditions, like shipping proof.
  • Once the goods reach the UK and are sold to local customers, the company raises sales invoices.
  • These invoices are then sold to a factoring company, which advances a significant portion of the invoice value (e.g., 85%).
  • This advance is used to settle the trade finance facility, ensuring the overseas supplier is paid.
  • When the end customers pay their invoices, the factoring company remits the remaining balance to the UK company, minus their charges.

  The Benefits Of Trade Finance And Factoring

  This gives your overseas supply the confidence to ship the product, knowing they will be paid, and it gives you a period of credit in order to sell the goods before you have to pay the supplier. Having confirmed orders from buyers that are credit-worthy is preferable.

  If you couple this trade finance facility with a factoring facility, once the goods are received and you ship them to your customers, you then raise your sales invoices to your customers for the products that you have delivered. The sales invoices are then submitted to the factoring company, which provides a prepayment against the invoices. This prepayment could be, for example, 85% of the invoice value, and that can then be used to repay the import funding trade finance facility.

  Advantages for UK Companies

  1. Extended Credit Period: By coupling trade finance with factoring, companies can enjoy a more extended credit period. This means they can sell their goods and realise profits before settling their dues with the overseas supplier.
  2. Outsourced Credit Control: Factoring companies take on the responsibility of collecting payments from customers. This not only ensures timely collections but also reduces the administrative burden on the company.
  3. Enhanced Cash Flow: Immediate access to funds through factoring can bolster a company's cash flow, enabling it to invest in growth opportunities or manage operational expenses efficiently.

  Example Case Study - see a case study showing how we combined Trade Finance With Factoring For An Importer.

  Receiving Your Profit Margin

  When your customers pay, the factor accounts to you for the balance of the invoice values (less charges) releasing your profit margin. In addition to this, the factoring company will then take on the task of collecting the debtor payments from your customers, such that you don’t have to undertake the credit control function yourselves.

  By operating these two kinds of facilities in tandem, you can benefit from an extended period of credit, and also from having an outsourced credit control function for your business. This can mean that you may not need to employ credit controllers or undertake the invoice collection task yourself.

  Summary And Conclusions

  For UK-based companies involved in international trade, leveraging the combined power of trade finance and factoring can be a game-changer. It offers a strategic approach to managing finances, ensuring suppliers are paid on time while maintaining a healthy cash flow. If you're considering this approach for your business, it's advisable to consult with financial experts to tailor a solution that fits your unique needs.

  If you would like to know more, please get in contact and we can find quotes for you for both trade finance and factoring.

  By Glenn Blackman