This method of financing is ideal for seasonal inventory peaks, long inventory turnovers and offshore inventory. For example, a company may qualify to borrow up to 100 percent of the value of the imported goods and not repay the loan until the receivables are collected from the customer.
“An important consideration is how long the company has been in business. Ideally, it should have a minimum of two to three years of business experience,” explains Cassie Stiles, first vice president of international trade services for Comerica Bank. “Also, we’re looking for positive financial trends and a strong balance sheet.”
Smart Business spoke with Stiles about trade cycle financing, who it’s geared toward, and how a company can benefit from this type of financing.
What is trade cycle financing?
Trade cycle financing provides sales cycle financing to companies that are importing and/or exporting. For example, from an importer’s standpoint, raw materials need to be purchased, products must be manufactured and delivered and payment must be collected. For the exporter, there are pre-export working capital needs, transit time and payment collection.
Trade cycle financing takes a company through the entire sales cycle and enables it to obtain financing through the life of the transaction.
Who is this financing method geared toward?
Trade cycle financing is geared toward importers and/or exporters with a proven track record. It is not an appropriate financing mechanism for a start-up company. It is more suitable for a mature company and by mature, I mean at least a couple of years in business. As far as the size of a business goes, this type of financing method is not usually practical for a very small company. Sales generally need to be more than $5 million for it to be cost-effective.
How can a company benefit from this type of financing?
My biggest concern when I’m talking to companies and trying to identify their needs especially small and mediumsized companies is that they don’t always recognize the length of their sales cycle. They tend to think that they just need to buy the merchandise. They forget about the collection cycle. This type of financing can smooth out a company’s cash flow requirements.
What payment mechanisms are available?
There are four basic payment mechanisms used internationally: cash in advance, open account, letters of credit and documentary collections.
All of these can be used in trade cycle financing. Factors that influence which method is used include where the supplier/buyer is located, the length of the relationship between the buyer and seller and the value of the merchandise.
What role does insurance play with trade cycle financing?
Exporters want to be able to extend open account terms to their foreign buyers. In many instances, a bank will not be able to finance these foreign receivables. Through an insurance policy from either Ex-Im Bank (Export-Import Bank of the United States) or the private insurance market, the commercial and political risk of these foreign receivables can be covered and the receivable can be financed.
For our importer clients, we are able to use an insurance policy to support their purchase order financing needs for up to 180 days. This enables them to import the raw materials to their facility (either in the U.S. or a foreign location), manufacture the product, sell the product, get paid for the product and then repay the bank.
The other type of insurance used in trade transactions is cargo insurance. This covers the merchandise from warehouse to warehouse.
CASSIE STILES is first vice president of international trade services for Comerica Bank. Reach her at (619) 338-1502 or email@example.com.