Commercial finance brokers and factors deal in often complex funding scenarios, with the “vanilla deal” often unseen.
Most brokers and factors that play in this space relish the challenge of injecting value into their client base.
Funding sources need to allow flexibility, expertise, and readiness to fund scenarios that require “outside the box” working capital.
Stak‘s fresh approach to trade financing in Australia has seen specialised brokers and factors uncovering new opportunities from once forgotten clients.
The term “Trade Finance” can seemingly lump almost any type of working capital product under its belt, however, nothing could be further from reality.
When we refer to structured trade, we specifically mean combining multiple assets or gaining a deep understanding of the fundable transactions within the client’s supply chain.
Typically, purchase orders, inventory, supply contracts, production, and receivables are the most common aspects considered.
What’s not obvious is how each facility is put together, importantly each client can be structured differently. From a simple line of credit through to line-by-line funding on each purchase order or contract.
Trade services get combined to facilitate large lends
A typically unknown feature of “true” trade financiers is their expertise across freight, shipping, and logistics. Often client’s that require larger facilities without balance sheet or traditional security in support require end-to-end management by the financier.
This control reduces the risk to the financier and ensures that goods shipped from suppliers safely arrive at end buyer locations or third-party logistics (3PL) warehouses without interference.
To better visualise typical scenarios, we’ve put together five recent clients:
Lighting wholesaler
When it comes to importing lighting from Taiwan or China there can be an assortment of nuances. The client already trading for a number of years traditionally focused on other product supply until a massive opportunity came along.
By almost chance, they were awarded two large contracts to supply local logistics warehouses and stood to make a healthy profit. The winning blow to their rival was their pitch to forgo a deposit to initiate supply for the completion of goods.
They had already exhausted existing banking facilities and couldn’t source funding outside the bank. They attempted to raise funds against personal assets however, this proved to be too expensive.
They reached out to a local broker who understood that the purchase orders could be used as a funding mechanism called purchase order financing. The lender would confirm the order with the buyer, negotiate payment terms with the supplier and manage the shipment directly to the buyer’s site.
The client was able to advance funds to the supplier, get it delivered, extend payments terms up to 65 days to the buyer and recover the profits once final payments were made without ever having to dip into their own cash flow.
Vehicle importer
This Western Australian heavy equipment dealer often holds stock in the yard including advertising and sourcing quality equipment from Europe and China.
When a civil contracting business walked through the door and ordered a $420,000 piece of gear it had to be sourced from China. The Chinese manufacturer simply would not ship on open credit (i.e no security). The buyer had finance approval from an Australian Bank which would only pay for the equipment once it was landed in Australia.
The dealer had a colleague who happens to broker trade finance products and understood that the transaction involved finished equipment and would be paid out once landed by the bank. This he knew, could be funded by a specialist provider.
The Chinese supplier was strong enough to honor any warranty issues and even agreed to buy back the goods should it be returned for resale.
On the back of this, a letter of credit was raised for the full amount required by the supplier with payment released on FOB shipping terms (once the goods pass onto the ship funds are released as a pre-condition in the LC).
Contract beverage manufacturer
It’s mostly understood that beverages are seasonal in nature, suppliers are hit with an influx of orders, including a complete slow down in payments from buyers when the season changes.
This beverage manufacturer was growing year on year by 22% and was bumping up against locally sourced supplier credit limits.
Because they are a contract manufacturer, the large orders are taken and raw material orders placed with the supplier for each project.
They originally approached an invoice financing provider that would approve a facility based on outstanding invoices.
After consideration, they realised that the cash flow taken from invoicing to pay suppliers would still have a delayed effect on the operation and leave them short. They began a search for funding based on the need to specifically fund just the raw materials for each contract.
Coming up short each time, they reached out to a local commercial broker who had heard of purchase order finance. This was no ordinary deal though as the financier had to assess the “production risk” of the client.
If the funder provided capital on raw materials that did not convert to a salable product to fulfill contracts, there would be no way of recovering the funds or could put the borrower in a position of repaying early.
Luckily the borrower had a sound track record, quality manufacturing processes, and systems which allowed “Production Funding” to take place.
Below illustrates a typical 180 day line of credit. The client receives funding for inventory purchases which is then repaid via a debtor finance facility. This enables the client to effectively offer terms up to 90 days to buyers without repayment on trade facilities until end payments are made.
A line of credit was granted for each separate contract combined with an invoice finance facility to facilitate repayments. This enabled the client to pinpoint the exact costs on each drawdown related to the orders.
From above, it’s clear these are not your average clients, however, with an experienced funder, introducers for the above deals were successful in sourcing funding.
Focusing on the transactions at the core of the need will arm you with a faster path to an offer.
Find out if Stak’s structured trade finance can assist your clients
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We regularly share our thoughts on trade finance, lending, company culture, product strategy and design.
Stak works with clients that sell to some of the largest buyers in Australia & overseas.
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Products mentioned in this Insight: Purchase Order Finance | Invoice Finance | Stak Equipment Plus+
