Unsecured Trade Finance – Old Hat Overseas, New Down Under
Since writing my last blog on trade finance, I’ve had requests for a little more detail on how it works. Mind you, one reader in particular was adamant that I leave out banking jargon and legalese in any explanation, so in the tradition of less is sometimes more, I give you: Unsecured Trade Finance.
Unsecured Trade Finance is an umbrella term for three products – purchase order (PO) finance, letters of credit (LCs) and inventory finance. These products may be used independently or collectively.
Where it differs from standard trade financing is that you do not need assets to secure funding. Put simply, AR Cash Flow will buy your accounts receivable/s based on the credit-worthiness of your buyer/s. In addition, commitment expires after delivery and payment, which means your business is not lumped with another long-term bank loan.
Here’s how it works.
- You receive a purchase order from your customer
- We verify with your customer the validity of the PO
- We open an LC to your supplier – This provides the deposit or costs for manufacture/supply of goods while also protecting your deposit from losses incurred through non delivery or damage
- Your supplier ships goods to customer
- Your customer pays us for goods
- We pay you the profit
A third component, inventory finance, can be easily bolted-on to the process above. Instead of goods being shipped to your buyer, they are sent directly to your facility which ensures you retain control over logistics such as inventory, packing and distribution.
The way the service works is pretty flexible. Generally we tailor the products around the particulars of each deal.
Now if we were in Great Britain, Europe or the US this would be no great shakes. Unsecured trade finance is old hat. I’m talking an old, comfortable, familiar hat – the type your uncle Frank might wear to golf or in the garden. However, in Australia it’s very new, which is surprising, given its successful track record, its simplicity of use and low risk exposure for importers.