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A South African-based businessman has recently brokered a deal for the supply of goods to an international firm. The broker expects the buyer and seller to sign the contracts shortly at which point he would like to apply for some form of short-term trade or bridging finance as he needs approximately R100 000 to visit various clients and suppliers around the world.
The surety the broker is offering a lender is essentially the value of the contracts to be delivered down the line.
Trade finance of this nature is typically taken on an instance-by-instance basis and there are few hard and fast rules for these situations.
While researching a response to this query, a theme from the lending organisation side became very apparent - too often, small business owners are coming in with no track record, no signed contracts, no goods delivered and no assets to serve as surety. As one lending consultant put it: "That's a lot of risk for any lender to take on!"
Maurice van Bergen, the general manager for trade and debtor finance at Sasfin, sees many such enquiries come in for financing.
Although Sasfin typically handles larger financing queries, there are some basics that all borrowers need to consider before applying for trade finance of any size.
Van Bergen says that a distinction between debtor finance and trade finance must be made upfront.
Debtor finance involves the company having actually delivered the goods or performed the service and now they are waiting for the invoice to be paid.
Trade finance, on the other hand, is a form of working capital based on the prospect of future business.
An important consideration for the Money Clinic query is that until the goods or services have been delivered and invoiced, many things can go wrong to prevent the invoice being paid. This increases the risk for the lender.
Van Bergen says that a company which has a proven track record, credit history, real clients and some assets to serve as security will stand a better chance of raising capital than an individual who has struck out on his own believing he can do a better job.
"It's the chicken and the egg scenario" says Van Bergen; without financing, your business will battle to get off the ground, establish its track record and buy some assets which it can later use as security or surety. Lenders conversely use these aspects to assess the credit worthiness of the borrower and entrepreneurs remain frustrated in the middle.
However, our consultants did offer the following as some potential advice:
- Friends and family are often a more likely source of funding for high risk smaller loans;
- Written contracts from reputable companies will carry more weight than the prospect of potential business;
- When signing contracts encourage the customer to pay a deposit - the client handing over money implies that they have more intention of honouring the contract;
- Present a realistic business case when applying for trade finance. While you might feel better about putting a "best-case spin" on the numbers to try and ensure you are going to get approval, remember that professional money managers are going to assess your proposal anyway, and if the numbers don't add up, then your financial skills will be called into question;
- Be prepared to put up security as surety for the assets - lenders have the job of protecting their loans;
- If you are a new business starting out and looking for trade finance, then pay particular attention to your personal financial status. If a lender sees that you are at the limits on your overdraft and credit card, they will immediately ask why lending you money for your business will be any different;
- Maximise your assets - emphasise that you have skills and a professional track record in business - set the lenders mind at ease.
Remember that your role is to present as little risk as possible to the lending organisation. The more you can show that you have a real business concept in place with real clients and orders in place, the greater your chance of getting the finance.
- Fin24.com
