October 31, 2023

Should Trade Finance Be a Standard Offering in an Asset Finance Company's Portfolio?

In the past few Finativ newsletters, I have highlighted an issue that has largely gone unnoticed in the finance sector - a formidable funding gap for businesses.

It's reported that, pre-COVID, smaller businesses in the UK faced a £56 billion trade finance shortfall, a void which has potentially widened in the aftermath of the pandemic.

On a global scale, the World Economic Forum estimated a staggering $2 trillion funding gap in cross-border trade, which grows year on year. 

Once deemed cumbersome and document-heavy, trade finance is now an opportunity waiting to be discovered.

Could asset finance companies without a trade finance proposition seize this opportunity to develop a comprehensive solution that addresses the gap and turn it into a profitable venture while operating within an existing risk framework?

A Call to Action for UK Financial Institutions 

Some asset finance firms have provisions to allow their clients to buy in overseas assets, commission them and then fund them on extended terms. Our view is that the time is right to build out this proposition into more asset finance companies because the ability to import capital goods is less complicated than it used to be.  

Most asset finance systems can be configured to ensure that the transaction is fully managed throughout the process and can handle both one-off purchases, as well as a line of credit that could be used to support either multiple single assets or a blend of assets, perhaps to support a client's specific project for say a new manufacturing line or broader multi-asset need. 

What are the Risks? 

Importing a new asset that has been manufactured abroad has its risks, but these can be managed. It will be important for the deal to be structured in a way that allows for the asset finance company to take ownership once the kit is in the UK, to mitigate VAT issues for example, and to ensure that the supplier is robust and trustworthy.  

Some of these issues are relevant whether they come from a UK supplier or not, others require new tools and know-how.   

If the asset finance company becomes involved with its client much earlier in the purchase consideration and arranges for some form of pre-lease financing to allow for the asset to be imported, then of course the deal itself will be far stickier when it comes from converting the pre-lease finance into the HP or lease.  

This logic is equally applicable to both direct customer relationships and the broker market, where a structured pre-lease option provides a competitive advantage in an otherwise crowded marketplace. 

Having expertise in both asset and trade finance, our view is that the current landscape holds a significant, yet untapped, opportunity for UK financial institutions. The growing funding gap in cross-border trade is not just a challenge but an invitation to innovate and support the growth of your customers. 

For more information, contact:

Richard Carter, Consulting Director, Finativ

richard.carter@finativ.co.uk

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