Trade Finance

What is trade finance? Let’s find out so you can better understand commercial finance.

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Trade depends on the fast, free exchange of goods and services; the more interruptions there are, the harder it is to do business. Trade finance is an important part of any commercial venture, especially for buyers and importers who may well need to finance the purchase of goods before they receive them. By making use of bridging finance, buyers can smooth out their business expenses and conduct deals in a timely, straightforward fashion.

While trade finance is an important factor in arranging international trade deals, it’s important for borrowers to bear in mind that they will be financially responsible for maintaining their outstanding loan. Because bridging finance is designed to function as a short-term solution, most borrowers will need to repay their loans as quickly as possible; trade finance users will almost always seek to repay through the sale of their goods, but if the deal falls through they can be left with an outstanding loan and no way to pay it off. For this reason it’s vital that anyone considering bridging finance as a way to obtain trade finance consults their financial advisor beforehand, in order to assess whether bridging loans are the correct choice in their situation.

Trade Finance and Bridging Loans

Trade finance is used to secure goods and services quickly, and provides both parties in a transaction with some form of security. For instance, an importer may well be required to pay upfront for goods before they can be shipped; few exporters will want to dispatch their products on a long international journey of several weeks before receiving payment. This puts the financial burden on the importer, though, and the requirement to pay for goods well in advance of receiving them can be restrictive. Few businesses can put together the capital to secure goods of much value, so trade finance is the only way to do business.

Generally speaking, a trade finance agreement will enable the exporter to receive payment upon shipping their goods, the proof of which is often shown through “bills of lading” (i.e. documents that prove the goods were loaded onto a transport). For other services which don’t require physical transportation other forms of proof might be required, but in any event the trade finance loan will be supplied when there is proof that the exporter has actually sent the goods on their way.

Bridging finance is well-suited to the demands of trade finance because it is a flexible short-term loan product, and as an asset-backed loan it can also be obtained for substantial sums of money. Trade finance loans need only exist for as long as the goods are in transit; once they’re received into the country, the importer takes possession and is able to sell them on. Therefore, a trade finance arrangement need only exist for the duration of the goods’ transit; often for a period of weeks, though in some cases it can take longer. Bridging loans fit well into this timeframe, and while bridging finance can be obtained for several months most lenders also cater to much shorter timeframes as well.

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How does a bridging loan enable trade finance?

Bridging loans are a highly specialised form of lending that can be put to many different purposes. Bridging finance is in essence a type of short-term loan that’s secured against the borrower’s assets; this means that businesses can borrow large amounts of money for short periods of time, and because bridging lenders work in very high-pressure industries they’re also able to work exceptionally quickly. This means that a bridging lender can give businesses the finance they desperately need in a very compressed time frame, often in less than a week, which enables borrowers to respond quickly to changes in the market.

Unlike mainstream lenders, bridging providers have a great deal of freedom when choosing their lending terms and conditions. Bridging lenders are free to prioritise customers with different needs, and can offer terms that suit each individual borrower. This contrasts vividly with the terms of a typical mainstream lender, where there is little scope to tailor loans for each client’s needs. This allows borrowers to take advantage of some highly valuable options, chief amongst which is the ability to defer all the costs of a loan until it’s repaid. Known as “rolling up” a loan, this delays repayment of a loan’s interest (and sometimes the arrangement fees) until the loan expires. This is exceptionally handy for trade finance borrowers, because it’s critical for importers to keep monthly running costs down while their goods are in transit; while it may potentially be more expensive in the long run to defer these costs, they will find it much easier to meet them once their goods are in the country (and on the market).

Bridging Loan Advantages

Working with a bridging lender to source trade finance allows borrowers to put together a bespoke loan package that’s tailored to their needs. A key benefit of working with bridging lenders is their ability to work quickly - this is thanks in part to the lesser regulation of the bridging sector in comparison with mainstream lending. Bridging lenders must still carry out thorough checks on a borrower’s ability to repay the loan, and will carefully value the assets to be used as security, but this process is carried out much more swiftly than in the mortgage sector. This speed is also enabled by the position of many bridging lenders within the lending community; many bridging providers have very close ties with or are themselves principal lenders. This allows them to make quick decisions without referring “up the chain”, a process which takes valuable time.

Because bridging finance is a highly flexible lending product, it’s ideally suited to the short-term needs of trade finance. By allowing businesses to act quickly and decisively when the time is right, bridging lenders enable UK importers to leverage their future business into the funds they need today.

Frequently Asked Questions

What is a bridging loan?

A bridging loan is a short-term loan secured against property. It allows you or your business to “bridge a gap” until either longer-term finance can be arranged, or the underlying security or other assets can be sold.

What is a commercial bridging loan?

Commercial bridging loans are, as their name implies, bridging loans that are secured against commercial property.

How can businesses use a commercial bridging loan?

There are many ways in which businesses can use a commercial bridging loan. Common uses are to cover short-term cashflow issues or to finance tax liabilities. More positively they can be used as working capital and by new businesses as a cashflow injection to acquire additional stock or even to acquire new equipment or premises for the business. Beyond these examples there are a huge variety of ways in which commercial bridging loans can be used.

Can commercial bridging loans be obtained on both a 1st and 2nd charge basis?

Yes. Whilst not as widely available as 1st Charges some lenders will happily write 2nd charge commercial bridging loans.  

Can commercial bridging loans be used by limited and offshore companies?

Yes they can. They can be used by a huge variety of companies and by foreign nationals who can struggle to get High Street Finance.

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Call us on 0207 043 5271

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