Trade Loan

Trade loans are revolving credit facilities that can help cover funding gaps that businesses face in between making supplier payments, and receiving payment from customers.

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What are common funding needs of trading businesses?

A trade loan is a flexible, short term financing option that enables trading activity to take place. Well-suited for wholesalers, distributors and importers, trade loans work as a revolving credit facility, and are used to finance trade transactions through a company’s trade cycle. It can cover a wide range of expenses related to running your business. These include:

Bridge cash flow gaps

Facing a cash flow crunch isn’t uncommon among small businesses. This can arise from a shortfall in capital that occurs between the time you make payments to suppliers, and before you receive payment from customers.

Taking out a trade loan enables business owners to effectively resolve these issues. A line of credit is an option you can tap on to make supplier payments, while invoice factoring can be used to release capital tied up in unpaid invoices.

Fund growth activities

With external financing, small businesses are better positioned to capitalise on opportunities they otherwise wouldn’t have been able to fund - such as taking advantage of bulk purchase discounts to achieve higher profit margins, fulfilling large-scale orders, offering better credit terms to reach a larger number of potential customers and broadening their network to work with a diverse pool of international suppliers and customers.

What are common types of trade loans?

Unsecured loan

Unlike secured loans, unsecured loans aren’t backed by collateral. Instead, borrowers are assessed based on factors like their business credit score and strength of cash flow. As a flexible financing option, it can be used to fund a wide range of business needs - from asset purchases, to growth activities and bridging cash flow gaps.

Line of credit

With a line of credit, you’ll have access to a pre-approved amount of money that you can draw from repeatedly. Interest is charged only on the amount that is drawn, and the line of credit can be repaid at anytime during the term of the loan. Flexible and easy to use, this form of financing is a convenient option for businesses that require frequent borrowing for ongoing trade.

Invoice factoring

Invoice factoring involves the selling of invoices to a third party company (the factor). The factor will first advance a percentage - up to 90 percent - of the invoice value. Once your customer has made a payment, the factor will pay out the remaining balance after deducting their factoring fee. This financing option is commonly used by businesses to manage cash flow gaps that arise from trading on credit terms.

Tips to help you prepare for a trade loan application

Below, you’ll find three tips you can implement to increase your chances of having your application approved:

Build your business credit score

Start by reviewing your business credit report on a regular basis (this may be obtained from DP Credit Bureau).This will give you a good understanding of the strengths and weaknesses of your profile, so you can pinpoint action steps you can take towards making improvements. These include:

  • Pay your bills on time: This is a simple, but fundamental step; if you fail to do so, you’ll still be considered a debt risk despite taking other measures to build up your business credit score.

  • Report positive payment experiences: Some vendors may report credit information to the bureaus, while others don’t. It’s best to work with vendors who report their payment experiences - you can verify this by checking with their accounts payable department - but if they don’t, you can add trade references to your credit report through a credit reporting agency.

  • Rectify mistakes immediately: Outdated, missing or incorrect information can make your business appear riskier to lenders, so you’ll need to check your business credit report regularly, and provide updates as needed.

Improve your personal credit score

And while your personal credit score isn’t a main factor of consideration, it can still have an impact on your business loan application. That’s because a personal guarantee is often required by lenders - particularly for new business owners seeking out loans, as their venture has yet to establish strong business credit. It’s also an indicator of how well you’re able to manage your finances - and as such, can influence your lender’s decision to approve your loan.

In addition to reviewing of your personal credit report to identify factors that are lowering your credit score, you can build credit by ensuring that your credit payments are made on time. If there were factors beyond your control affecting your credit, you may consider submitting a letter of explanation or seeking assistance from a credit repair service

Invoice factoring: Who your client is matters

“Who are the parties involved?” is a key question that factoring companies are concerned about when it comes to your invoice factoring application. To increase the odds of getting your loan approved, you’ll need to select an invoice from an established client. This is particularly important for newer businesses without a solid credit history, as you can capitalise on your client’s creditworthiness.

Line of credit: It’s about timing your application right

In timing your loan application right, you’ll be better positioned to have access to a higher limit, lower interest rates and a more accommodating repayment time frame. A good time to make your application would be when you’ve experienced revenue growth for about three to six months, and have a strong credit score.

Where can I get a trade loan for my business?

Traditional lenders often impose strict criterias. In general, businesses are required to have an operational history of three years, a minimum annual revenue of at least $200,000 and an average daily balance of $10,000 to $20,000 maintained in your bank account - and as such, may not be a viable option for newer ventures and small businesses. Increasingly, these ventures are turning to alternative providers, whose streamlined processes and flexibility are a better fit for their needs.

With Aspire, loan application processes are convenient and speedy - submitting an application takes a matter of minutes, and you’ll be notified of your loan approval status in just 24 hours.

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