In today’s increasingly competitive marketplace, a growing number of UK businesses import goods from overseas suppliers in order to benefit from lower manufacturing costs. However, these suppliers can be understandably cautious when shipping goods to foreign buyers and often request some form of guarantee that the purchaser has the wherewithal to fulfil their financial commitments (such as 100% pre-payment).

This can prove problematic to the buyers and put extra pressure on their own financial commitments. In this situation, the element of vulnerability is shifted to the purchaser, who is by no means assured the goods will ever arrive.

The easiest way to overcome this issue and generate peace of mind is through the use of trade finance. This form of funding protects and supports organisations when importing goods and, perhaps most importantly, bridges the cash flow gap between purchase and sale. Trade finance is particularly useful for businesses that do not have sufficient capital to pay for goods up front, or where suppliers insist upon clear evidence of the ability to pay when orders are placed.

Venture Finance has innovatively combined trade finance with the benefits of invoice finance. This provides a service that allows importers to pay for goods from overseas suppliers and have their own cashflow cycle supported right through, until their own customers pay for the original goods. Having these services under one roof provides a seamless financial transaction and supports a steady, positive cash flow.

The process is simple to implement and comprises a few easy steps. Having agreed to purchase goods from abroad the importer asks Venture to raise a letter of credit (LC). This document contains a number of terms and conditions to which the supplier must adhere - including the necessary documentation to support the sale and also acts as a guarantee that the financier will release payment once the order has been shipped.

A supplier often gives priority to orders covered by an LC, as this agreement protects both the exporter and the importing business. A letter of credit is flexible and can be adapted to suit both parties.

Once the LC has been forwarded to the supplier’s bank, the goods are produced and shipped. At this point the supplier forwards all relevant documentation to the financier, after which payment of the LC is released direct to their bank. The final step in the process is for the importer to distribute the goods to their customers and raise an invoice. Funds are immediately released by the financier into the importer’s bank account through an invoice finance facility, whether factoring or confidential invoice discounting.

If trade finance seems like an attractive option, there are a few key tips to bear in mind that will significantly enhance the process. These are:

Be precise
To avoid misunderstandings, give clear and precise instructions to a financier when applying for an LC, and ensure all the terms and conditions agreed with the supplier are clearly stated. Points to agree with the supplier include responsibility for paying opening charges and potential amendments at a later date. Often the supplier will expect the importing business to absorb these costs, but this can be negotiated and is well worth discussing before setting up the agreement.

Level of funding
When arranging trade finance services it is vital to agree the correct level of funding right at the start. Trade finance should match individual business ambitions, so if the aim of importing is to encourage growth, the company must agree sufficient funding to cover potential as well as existing orders.

Be prepared
Well-worn sayings such as ‘proper preparation prevents poor performance’ only exist because they are true. To minimise hitches in the importing process a company must first have the correct paperwork in place. Having the wrong licence, or not having a license at all, can result in costly delays when shipping. HM Revenue & Customs website (www.hmrc.gov.uk) can provide useful guidance on whether specific imported goods are subject to quotas.

Pay your dues
Ensure sufficient cash flow is available to pay customs duty and VAT on time, as significant penalties exist for non-payment. All EU member states charge the same duty tariff to goods imported from outside the EU. In the UK, VAT is payable at the same rate as UK goods and services for most imported goods.

Go Independent
It is worth approaching independent financiers for specialist facilities such as trade finance who are often more accommodating and flexible than high street banks. Clients are more likely to be a name rather than a number, and will have a single specialist point of contact rather than having to deal with multiple departments.

International expertise
When looking to trade internationally, a business should choose a financier with proven international expertise. There will be language, legal and cultural differences to consider when dealing with overseas suppliers, so a company with a network of overseas branches will be best placed to help smooth the path.