With the current hyper-competitive environment of the finance industry, it seems to me that lenders have begun marketing that they provide almost every type of finance offering in existence, just to attract prospects and referral sources.
Trade finance is becoming one of the “offerings of the moment” for lenders of all kinds. However, most U.S. asset-based lenders have little-to-no experience in cross-border trade finance, yet they still advertise this offering to attract new business. Trade finance is not domestic finance with an accent. Different risks and laws must be considered, not to mention languages and cultures.
Today, as international sales become increasingly important to small and medium-sized companies, those companies find they need access to knowledgeable and well-capitalized sources of cross-border finance to allow them to grow sales internationally. When considering a lender for trade finance, businesses should identify ones with expertise and risk tolerance in order to benefit from true trade finance solutions. Companies that specialize in cross-border finance have done so for decades.
The term trade finance, at its core, describes the financing of goods sold to buyers across international borders. The definition has now expanded to include more finance options than international banks originally provided. Trade finance traditionally referred to financing of specific international shipments, often with a repayment structure that included bank letters of credit, trade drafts, or other forms of secure payment assurance. Financing was structured by banks for large exporters with big, domestic balance sheets.
Purchase-order finance is a form of trade finance that offers solutions to small and medium- sized companies that do not have the capital or balance sheet to support large or growing international sales. A competent provider of purchase order and trade finance has a thorough understanding of how to buy and sell inventory as well as extensive experience with logistics, customs, duties, import/export regulations, currency issues and, most importantly, repayment. When a finance company has the expertise, capital and risk understanding of cross-border business, they can be an invaluable partner for clients wishing to grow internationally.
On several occasions over the course of my 20 years in purchase order and trade finance, it has been suggested that we consider offering factoring or accounts receivable financing along with our purchase order and trade finance solutions. This was presented as a vehicle to expand our business and add customers. However, I believe that in the finance business, not unlike other types of businesses, a focus on what you do best gives you a competitive advantage and offers your customers the best solutions for their particular need. Trade and purchase-order finance requires discipline and expertise to offer the best finance solutions to clients.
As markets around the world continue to evolve, trade finance will play an increasing role in the growth of small, medium, and large companies worldwide. It is vital for an expanding company to have a finance source with experience in implementing proven structures and oversight to help mitigate the risks of trade with different countries. In fact, small to medium-size companies do greatly benefit from the expertise of a discerning and honest trade finance source as a partner in navigating international trade.
There is a difference between an experienced trade finance source and a domestic lender that occasionally offers international trade financing as an adjunct to their primary business. A finance company specializing in, and dedicated to, purchase order and trade finance is better qualified to provide the availability, knowledge, attention and service a client needs when dealing in international markets.
Author: Edward King is the founder and managing partner of King Trade Capital (“KTC”) the United States oldest and largest independent purchase order and trade finance company. He is past member of the Executive Committee of the Commercial Finance Association and is a member of the Young Presidents’ Organization. He is a regular speaker and panelist discussing the specialized finance solutions developed at King Trade Capital. Edward received a BA in Economics and a Minor in Business from Southern Methodist University in Dallas, Texas.
Excellent points Edward, and well taken. Trade Finance is indeed a discipline where “one sized does not fit all,” and requires very specific expertise and experience. King Trade Finance is the best in the business, and I appreciate your contribution to the professional dialogue and support of the Commercial Finance community.