It is often thought that trading internationally is the reserve of the large corporate, however in some way or another most businesses have an international element.
Take a clothes retailer, this could be a bespoke fashion outlet. These days they are likely to import from China or Turkey and sell to the UK, the same principle applies to electronics or IT where hardware is often sourced from Asia or Eastern Europe.
The ease of communications and availability to speak direct with suppliers or buyers in any country has made cross border trade the option of all.
As with most financial products, they seem more complicated than they are. If you have any questions about this then get in touch and we will explain.
Cash Cycle
This is our starting point. Once you understand where your need for cash is, and how long that need for cash lasts, then you can start to look for solutions. Never do this the other way round, always understand the cycle first, then seek a solution.
Let us use an example or a clothes designer who designs clothes then has them made in China and sent to the UK. They then sell to wholesalers or direct to retail outlets.
- Day 1 – Designs sent to China and order placed
- Day 7 – Product is complete and ready to be shipped
- Day 10 – Now shipped and has left port in Beijing
- Day 45 – The product has now landed at Felixstowe and can be sent on to you
- Day 50 – Received by you
- Day 60 – Goods checked and dispatched to your buyers
- Day 61 – Invoice for sale is raised on 30 day terms
- Day 90 – You receive payment for your goods
In this example it takes 90 days to complete each trade cycle.The cash cycle looks like this -
- Day 10 – Payment of £30k is required to be sent to China
- Day 90 – You get paid
In this example there is an 80 day hole in your cash flow. Add in to this that there is likely to be another order ongoing at the same time and suddenly cash flow is a real issue. However, you understand where your cash is and can now manage things effectively.
There are more options than you think, after all you are seeking finance on a specific transaction where specific goods exist and timescales can be fairly certain. In this respect most lenders are keen to assist because they can track their cash and understand what is going on.
Let us propose the following -
- Day 10 – Issue a ‘Letter of Credit’ to the Chinese manufacturer. This is effectively a guarantee of payment backed by a financial institution
- Day 45 – Goods arrive. You take an ‘Import Loan’ which advances you the £30k cost of goods and sends it to China
- Day 61 – You raise your invoice and pass to an invoice financing company, they pay you and you pay off your Import Loan. You now have your cash and you cycle ends here
- Day 91 – Your customer pays and interest stops on your invoice financing
It may seem a cumbersome or confusing series of steps, but understand it once and it becomes easier. It also shows that trading abroad can be easier on your cash then trading domestically.
Questions
If you have any questions with this article then please contact us on 01293 541333 or click via the website here.
Lime Commercial Finance are able to offer solutions to all of the above, so please use us and we will talk you through the whole process. Feel free to add your comments above and we will respond.
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