Case Study: Trade Finance for Civil Construction

Trade Finance Case Study for Civil Construction

Our client, a civil construction company working with top-tier clients, spoke to us about suppliers who were not extending enough credit to support them until their progress payments came through.

Working with our lenders, we secured a $500,000 Trade Finance Line of Credit which our client could use for all material purchases. The client now supplies the invoice to our lender, the lender pays the supplier and provides our client 120 days to pay the amount.

This facility did not require property security.

This cash flow solution allows our client to keep their jobs moving and preserve cash for wages and non-material costs.

Caught in the cash flow gap

When you’re unable to access business finance while you’re waiting for progress payments — or any other form of cash flow — it can be an incredibly stressful time! Especially when you need to purchase stock or equipment to continue your work.

Without access to working capital, a business can be brought to a complete standstill when caught amid a cash flow gap. This gap is the period between when you’ve paid money to purchase materials (or any other expense) and you’re waiting for expected income to hit your bank account.

To reduce the cash flow gap, you need to either delay payments for your purchases, or bring forward your expected future income.

There are a few ways to achieve this:

Delay payments: Negotiate credit terms

If you’re purchasing goods on credit terms, you may be able to negotiate extended payment terms with the supplier. If you’re able to delay paying for goods for more than 30 days (as an example), you may be able to avoid the cash flow gap if you’re paid for the work within that 30-day window. The revenue you make could be used to directly pay for the cost of goods sold, with the profit being reinvested into the business!

For example, you’re a manufacturer who sells machine parts. You purchase parts required to make your machine parts that have been ordered, and rather than pay suppliers upfront, you negotiate extended credit terms of 30 days. Once you receive the goods, you’re able to produce the machine parts within a week and pass them over to your client. If your client pays at the time of delivery, you can now use that money to pay for the parts you ordered under 30-day credit terms. In this scenario, you’ve avoided a cash gap!

Delay payments: Use Trade Finance

The way Trade Finance works, you can essentially create your own credit terms or extend existing terms with your suppliers. This works as follows:

1. You order goods (via either local or international trade) and forward the invoice to your financier.
2. The lender pays the supplier’s invoice upfront.
3. You have up to 180 days to repay the finance — this gives you plenty of time to mark up your goods, deliver them to your clients, and receive payment.

Another benefit of Trade Financing is it helps to manage supply risk by ensuring your suppliers are paid on time.

To extend credit terms, you simply make an order from your supplier under payment terms (let’s say 30 days). The goods are shipped to you, and an invoice is issued for payment. You submit the invoice to the lender around the time the payment is due, the lender makes the payment, and then you have an extra 120 days on top of the 30 days credit terms.

Bring forward income: Reduce credit terms

If you provide goods or services on credit terms to your customers, you could reduce the terms — from, let’s say, 30 days to 14 days — to realise your income faster. This relies on your customers reliability in making payments by the due date though, so you’re left open to a certain level of payment risk. Reducing your credit terms also has the potential to damage relationships with your clients.

Bring forward income: Use Invoice Finance

Invoice Finance works at the opposite end of the sales or trade cycle to Trade Finance. It allows you to access cash from invoices you’ve issued to your customers before they’ve made payment. Instead of waiting weeks for your customers to pay, you can simply access a line of credit based on the value of the outstanding invoices. Once your customers pay, it pays down the line of credit, and the rest of the cash is released back to you.

Trade Financing can free up cash flow

As we’ve demonstrated, Trade Finance takes the pressure off having to pay for supplies upfront, giving you the room to make money without having to worry about paying money. With a comfortable cash flow position, you’re free to take on new business opportunities without stress.

It doesn’t matter whether your supplier requires upfront payment, provides credit terms, is a local supplier or is even part of global trade, Trade Finance can provide the cash flow buffer you need to smooth out cash flow concerns — and by paying your suppliers up front, you may even be able to get early payment discounts.

If you’d like to learn more about Trade Finance, request a free quote and we’ll be in touch ASAP to discuss your business needs, circumstances and lending criteria.