Why should you consider trade payables financing?
Part 3 of a 3-part series about international business
Is your business a manufacturer, distributor or wholesaler? If your company buys goods domestically or internationally, a trade payables financing program can enhance your ability to finance inventory. More access to credit for financing inventory can be especially beneficial if your business has seasonal peaks or is managing an unusually large order. A trade payables financing program could allow you to ease cash flow issues by financing over a longer period or with a more generous advance rate since you can borrow against inventory while it's still at sea or drop-shipped to a customer's warehouse. In addition, you may be able to take advantage of early payment discounts from your supplier.
The nuts and bolts
Here's how it works: Your bank pays your supplier directly on your behalf. Or you can be reimbursed for payments you've already made to your supplier, as long as transport documents are less than 60 days old. In either case, you don't have to deplete your cash reserves. You can finance this trade cycle for up to 180 days from the date you take title to the goods. And the financing can be up to 100 percent of the cost of the purchased inventory.
Financed transactions can cover domestic or foreign purchases for the purpose of manufacture or immediate resale to buyers in the U.S. or abroad. The country of origin or destination is not a determining factor (unless prohibited by a government sanction). Eligible transactions can be on letter of credit, documentary collection or open account terms, and you can finance the payment of trade credit payables due to one or multiple sellers.
Financing can begin as soon as you take title to the goods from your supplier, which is often at the time of shipment. As long as you have title, the goods can even be parked at your customer's warehouse. Purchases from affiliates, such as parents, subsidiaries, and other firms with the same ownership as your firm are not eligible.
Instead of putting you at odds with your suppliers, which can happen if you seek to extend payment terms, trade payables financing works to the benefit of both parties. Your supplier is relieved of the risk of nonpayment, while you enjoy the benefits outlined above.
You'll be required to provide documents for each advance from your trade payable finance line of credit, including a transport document such as a bill of lading, invoice, and instructions and certifications for each transaction. Additional documents may be required in some cases.
Trade payables financing is generally less expensive than factoring, in which you sell your accounts receivable to a third party (the factor) at a discount. The pricing is also more attractive than other nonbank financing options.
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