Yesterday I was talking to a new client – an importer and distributor of food products. They’d been using a factoring facility for some time and had reached out to me with some questions about setting up a Trade Finance facility. The purpose of the facility was to help them grow by allowing them to take advantage of increased buying power that would allow them to make bulk orders and secure specialised items that became available just a short period of the year.
In talking through the features of the trade finance facility and how it would work in with the clients debtor finance facility the client stated they didn’t understand how an overdraft would fit in. The uncertainty being that all three are forms of credit and both trade finance and an overdraft could be used for purchasing inventory.
The key to working out if both kinds of credit are relevant to you is understanding the terms of the finance. Trade and debtor finance work really well and are essentially purpose built for an import and distribution model (or wholesale and manufacturing businesses for that matter too).
Trade finance allows you to pay suppliers COD and then gives you time, up to 180 days to repay the cost of those purchases. If you’re importing food products for instance, once payment is made by the financier, half of that inventory may immediately be distributed out to a retail network and the remaining may be stored while the business can payback the cost of those goods as they’re receiving a return and profit for them. The benefit of this is that a business can preserve capital (or not need capital) and still take advantage of their opportunities – like making a bulk order in preparation for the Christmas period as an example. This is really useful if a supplier is running a special of some kind and we’ve always encouraged our clients to ask for a discount for paying their suppliers COD which can more than negate the cost of the finance.
An overdraft works alongside this as a backup support to a business. If cash flow dips, like it can during the January shutdown period for many businesses, an overdraft is a great backup plan. The food business client I spoke to yesterday had an aha moment when he said to me, “Now I get it, an overdraft would have been great when our freezer died a few years ago.” It’s not an account you want to have maxed out all the time but whether you’re a wholesaler, a builder or in manufacturing it’s a product that really supports you when you’re looking for capital to grow and backs you up when those unforeseen costs and issues come at you.
At the conclusion of the call we talked through overdraft options and I shared that there are now unsecured overdrafts available that can be setup in a few days. We talked through the process, the client stated they could see the benefit for their business and we submitted the application whilst talking over the phone.
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