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Finance Focus helps businesses navigate the ever-evolving world of finance. Each episode features expert insights, practical advice, and in-depth discussions on topics such as crowdfunding, trade finance, angel investing and debt. Hosted by Tracy Smart from The Smart Team and Sam Jones from Satellite Finance.
[00:00:00] Sam Jones: Hello, welcome back and welcome to new listeners to the Finance Focus Podcast. I'm Sam Jones and I'm joined by my co host, Tracy Smart. Today, we're going to be talking about trade finance and how that supports SMEs grow internationally.
[00:00:18] Tracy Smart: Trade finance eases the cash flows for importers and exporters by funding the transactions to help them manage the risks associated with global trade. Today we're talking with Steve Rose, CEO of Tint Financial Services, a funding provider set up to do just that.
[00:00:34] Sam Jones: Throughout this episode, we'll find out how trade finance works, explore the risks, discuss the benefits, features, and where this funding works well. For instance, I have a client who sells prosthetic limbs.
[00:00:45] He's an international arms dealer.
[00:00:46] Tracy Smart: Okay. Anyway, so,
[00:00:49] Steve will share his invaluable insights and experiences providing you with actionable advice and tips to help you through your trade funding journey. So, Steve, just to set the scene, can you tell us a bit about yourself and your background?
[00:01:02] Steve Rose: Yes, of course. and thank you very much for, asking me on. So I'm an accountant by trade, I studied locally, at Oxford and was very glad to be able to come back, in the latter half of my working career. I did the classic thing in terms of going through, university, wanted to do what was my fun subject rather than a vocational subject. And then along with about half the population, at the time I was coming out of university, I went and joined a chartered accounting firm, qualified with them. Realised I didn't want to stay in the accounting pure. Wanted to be out in, um, wider industry.
[00:01:32] So, um, I joined Barclays Bank. at the time there were actually very few accountants in Barclays Bank, but I was one who joined there. and throughout my career,from there really has been focused on finance roles in financial services companies, but in the business side of what they were doing.
[00:01:49] So Barclays Business Bank, I worked at Aspen, insurance who were specialists in Commercial insurance. And I've worked with Bibi financial services, and now I'm working with the Storm Group, in again, helping companies, whether it's with their IT, whether it's with their supply chain, or with Tint with financing their Trade. Which is probably worth defining actually at this point in, so trade when I'm talking about it in the sense, I mean moving goods effectively across borders, because trade can mean many things to lots of people.But trade in terms of trade finance, what we mean is companies who want to move goods, import or export across borders, doesn't have to be our borders, but it's across borders.
[00:02:26] Tracy Smart: It's commonly known as trade finance, isn't it? And where you actually fund the transaction of the import or the export. Can you just help us understand how that works?
[00:02:34] Steve Rose: No of course.If you think of it very high level in any transaction, by definition, if you're going across border, you have a, an exporter and an importer. Typically the exporter of the goods wants to be paid either when the goods are leaving or in advance in their ideal world, but at the very least, when they finished producing them or when they go over what we call go over the rail of the ship.
[00:02:55] So they're going on the port side and they're going onto the ship. I mean, in reality these days, some go onto aeroplanes, but not that many. go over the rail onto the ship. So they want to be paid then. The person who is importing the goods typically doesn't want to pay until they've over the rail at the receiving port, or preferably for them, they've arrived in their warehouse, they can check it and it's all okay.
[00:03:17] So that time gap, is the period where you're funding. You're effectively trying to help businesses by funding the exporter in selling, so that the importer can then receive the goods and then the importer is the person who's paying it back.
[00:03:32] Tracy Smart: And how long is that gap?
[00:03:33] Steve Rose: That's a really good question. So obviously depends where it's going.
[00:03:36] But, if you say on average, the average funding period, which we have, is about 60 days. Once, everything kicked off in the Red Sea and the Hooties started firing missiles at ships, they went a lot further on the journey. So now it's actually running at about 80, 85 days. So it's typically between that. But obviously if you're dealing with continental Europe into the UK, it can be as short as, a week, eight days and, even from Asia Pacific into Europe, if it's on a plane, again, your funding period is typically eight to ten days. So it does vary, but on average, it's 60.
[00:04:08] Tracy Smart: What's the sort of ticket? How much is the value usually?
[00:04:11] Steve Rose: That's a really good question. Our average ticket, would be somewhere between $100,000 and $200,000. And the reason I say dollars is because most trading goods, not all, but most is priced in dollars. Why is it that high? The main thing that pushes the ticket size up is, if there's legal work involved in setting everything up.
[00:04:33] So if you've got, if you're moving goods from point A to point B, quite often the relationship involves a lot of legal work. And therefore when you're funding it, then the legals could be quite complicated. That costs money to set up. So that tends to push the ticket size up because it's only when the ticket size reaches a certain size that a company thinks, yeah, okay, that's worth my while. I'll do that.
[00:04:55] Tracy Smart: Yeah, because otherwise the legal fees are just too much, proportionately, I guess, to the whole deal.
[00:05:00] Steve Rose: Yeah. No, that, that's exactly right. So that, that's the main driver of the, of the ticket size. But it does vary a lot. And if you are in a very vanilla transaction, which is really straightforward, then you know, the legal cost could be a lot lower and it, can be a lot smaller.
[00:05:13] The other way, it can work in practice, is where the funding is going to somebody who I would describe as a market maker. So you've got some people out there who help people who trade goods in and out, and they may only do one or two transactions, but the market maker's doing loads of transactions.
[00:05:30] So we can set the legals up with the market maker, and then he can then spread, or she can spread the costs over a lot of other transactions. So sometimes it works like that.
[00:05:38] Sam Jones: So you're looking at Tint Financial Services, what's their typical average client look like? What's their makeup, market, size?
[00:05:46] Steve Rose: The transaction size will vary from, I think probably our smallest is about $10,000 and then that can go right up to about a million. It can vary that much. And the people we're helping,typically,well, in the good old SME definition, you'd typically put it on the lower side of the M. They have often been running for some time. They've gotan established business, but they're looking to grow.
[00:06:07] In terms of what, who we can help, obviously they're not at a size where their high street bank are happy to help. So they tend to be, in medium, business size, but, typically at the smaller end of that, because if they're very large, then a mainstream bank can set up a special facility for them, and that's their most cost effective way of doing it.
[00:06:25] And if you're a micro company, then typically the transaction size isn't big enough to make it worthwhile, so you're kind of in the middle.
[00:06:31] Sam Jones: Okay, and are there any goods, that you struggle to fund being traded?
[00:06:35] Steve Rose: Uh, well, if it's sanctioned, or if it's illegal, they're quite difficult to do, so we don't do those, obviously. The most important thing I would say we look for, really, is you're trying to understand that the transaction is with people who are reliable, and they therefore trade regularly, and you've got history there.
[00:06:52] So that tends to be the bigger factor, and my risk people would tell me, we stay well away from perishable goods. That's not always true. But itwould be very fair to say that perishable goods are difficult to fund. For the obvious reason that if it's perishable and it gets stuck somewhere and you have a problem, you can end up with your security rotting on a quayside.
[00:07:10] Soit's harder with perishable, but if you've got a really established. Clear supply chain where things work, and you can mitigate it, and you can look at it. But,it's a lot easier with goods that aren't perishable, for obvious reasons.
[00:07:23] Tracy Smart: So we started to touch on risk a little bit.
[00:07:27] What's the biggest risk from, I mean, there's two sides of this coin. So from the funder's perspective, from Tint Financial Services perspective, but also from the client's
[00:07:36] perspective, they're taking a risk as well.
[00:07:38] Steve Rose: The best way I'd describe that to start with, is if you're like taking a step back a bit, and saying for any funder, when they're looking at any kind of transaction.Somebody in business might be asking, why are there all these different kinds of funding?
[00:07:49] Why is there invoice financing and loans and overdrafts and trade? Why are there all these different things? and essentially the reason there are different things is because the funder is trying to complete the transaction in a way in which they have some security. And you can get security in different ways depending on different things a company does, and in the case of trade finance, as a funder, your key security are the goods that are being moved.So,we won't take charges over companies buildings. We don't take personal guarantees or that kind of thing. For us, what we look at is the goods that are being moved and therefore your biggest risks are associated with those.
[00:08:28] But the, risk, which I always think is much easier to just talk about rather than,try and find euphemisms for is fraud. So your biggest risk is that if you're buying from somebody who's,not somebody who you're directly in contact with, then obviously you run the risk of fraud.
[00:08:40] Similarly for the business who you're trying to help, their biggest risk is whether or not they trust the counterparty. That's why the people we find easiest to help are people who are in established trading relationships. In its most simple form, if you're trying to help somebody who's already dealing with people, it doesn't mean they have to have traded all the time, but they know them, and therefore you've got that element of contact.
[00:09:00] Which also tells you they know what they're doing,because, you know, you can get situations where people get into trouble, actually not because of deliberate fraud, but just out of,sorry I don't know if I can say this on a podcast. Cock up rather than conspiracy, if I
[00:09:11] put it that way.
[00:09:12] So you can have that kind of problem,which you need to be able to guard against.
[00:09:15] And therefore for the, the customer, their biggest risk is similarly, if they're entering an area where they've not work before, so that might be in your country or a new client or something like that, just not understanding some of the bits you need to get right.
[00:09:27] And that's one of the reasons why we try and wrap up, in terms of what we offer to clients, it's not just the funding, we try to pick up on the insurance as well, because obviously the client then gets the benefit that they're good suppliers properly funded and they know that, whereas the main thing we find is people under insure typically compared to what they need.
[00:09:45] Tracy Smart: Because you wrap up a whole bundle of services, including the legals and the insurance and the actual finance.
[00:09:52] Steve Rose: That's right. Yeah, and it means that you can, by looking across the piece that the customer gains the benefit that they only have to give the data once rather than have to give it to an insurer, to a banker, to whatever, and then, the second advantage you get as the customer is that you know that the data is consistent.
[00:10:08] And why is that important? It means if you did have to make a claim, you haven't got a problem where the insurer says, well, that's not what your insurance policy says. It says something else. So it keeps the two aligned. And again, you might sort of think, well, isn't that really quite simple? Um, give you a typical example.
[00:10:22] If you're moving, a cargo, which has been out in the open. It will weigh one amount when it's dry. If it's rain before it gets loaded into the container, it'll weigh another amount. It'll then get transferred to the harbour. The harbour side will weigh it. It might weigh another amount.
[00:10:37] Then it gets shipped across seas. By the time it's reached the other end, through natural processes, there might be other things that cause it to weigh. So you can get things which cause variances in the data, which needs to be able to manage and understand. And other things you get,you might get a load going to a customer, on route, something happens to the transaction that can no longer go to the customer you thought it would.
[00:11:00] And then you have to move it to another customer. So you have to be able to adjust and change that, it's a whole piece of coordination. And what we're doing is we get the data load in, or data information in once we can then keep it up to date and up to speed and make sure they don't get out of line.
[00:11:13] It's that kind of thing.
[00:11:14] Tracy Smart: So you mentioned data there. Before we started to record, you mentioned, a new data act. Tell me more about that.
[00:11:22] Steve Rose: No, absolutely. And, um,It's a change that's come in called the ELECTRADE Documentation Act, the ETDA. And it's something where, as a country, we're actually at the forefront. So Britain is one of the, if not the, certainly one of the first countries in the world to ratify it.
[00:11:36] It's now slowly being ratified in different countries. And what that is doing is setting in place the legal framework for the documentation for trade to be exchanged digitally. This is one of those areas where it really is a genuine saving. Whereas under the Pre digital system, everything had to be exchanged by paper and you were literally waiting weeks for paper to come right around the world and to complete the cycle and complete everything.
[00:12:01] Tracy Smart: A physical piece of paper?
[00:12:02] Steve Rose: Yeah, physical piece of paper, absolutely, or it might be a fax or something like that, but yeah, essentially a physical thing. And in some cases it's only valid if it's got the physical signature on it. And some countries only recognize wet signatures, they won't recognize digital signatures and things like that.
[00:12:15] What the ECDA Act does is set up a framework where you can exchange the data electronically and, and that will have a dramatic effect. It was actually something where we did a good job on it as a country. And,one of the reasons why we looked at Tint was exactly to try and, um,be at the forefront of as it rolled out. Because over time, as more countries, adopt it, I think France is just adopting it now.
[00:12:37] Then it will become embedded as how companies are used to exchanging data. And that then means, as a funder, you can be much more efficient. But as a business wanting to trade, it'd be one of the first things that actually makes it easier. So having things got a lot more complicated, post Brexit, it'll be one of the things which would. help re simplify the process again.
[00:12:56] Sam Jones: So is that, the ETDA, is that, was that bought because of Brexit, was it in the pipeline?
[00:13:00] Steve Rose: No. I think it was just a good idea and, people have been trying to do it for a long time. But obviously with the mood music, with Brexit happening, that the country needed to becomebetter at trade again, being able to trade with different, people who weren't necessary in your own trading block and you needed to be better at it.
[00:13:15] It was something I think the government encouraged at the time for that reason,and it is a good framework.
[00:13:20] Sam Jones: I've nearly fallen off my chair. Someone in the government had a good idea!
[00:13:23] Steve Rose: No, absolutely.
[00:13:23] Sam Jones: And it's in place. That's incredible. So, obviously, we've got a bit of a change across the pond, and how do you think tariffs are going to affect trades?
[00:13:32] Steve Rose: Fairly dramatically when they come in. I mean, clearly when, tariffs come in for, which they will in some form or other, I think, then anyone in particular who's doing a particular trade is going to take that into account in the economics. And, you don't have to have an economics degree to know that if somebody sticks a cost on one side of a trade, it's going to slow trade down.
[00:13:48] So that will be a factor. How it's actually going to play out, I think it's impossible to know. I mean,whether you're a supporter or an opponent of Trump, the one thing I think everybody would agree on is that he's unpredictable. So let's just wait and see how it plays out.
[00:14:02] Sam Jones: I mean, I heard one theory, he's obviously promised jobs and industry back in the States. So if you whack up tariffs it might be cheaper to move your factory over there. Job done. But that's just one theory.
[00:14:13] Steve Rose: Yeah, no, absolutely. And there'll be things like that. But I mean, there are some things which move cross border because they have to, and then, there'll be other things which still the economic imperative will still be to move it cross border just because it's more cost effective.
[00:14:24] Major part actually of what we fund in goods being moved cross border is, metal being sent for recycling. Say you go to a car plant and they press a body for a car you actually get a whole load of steel comes off the side of the pressing. That then gets compressed down, stuck in a container, put on a ship, and that's all going from Europe and America to Asia Pacific instead of Asia Pacific to, Europe and America.
[00:14:46] So you'll have, trades going both ways where it's going to be in both parties interest to work out a way of dealing with it.
[00:14:54] Sam Jones: Then have we seen a shift from sort of just in time trade cycles with Covid and the Hooties and the, I can't remember the name of the ship that crashed in the Suez.
[00:15:03] Steve Rose: The Evergreen.
[00:15:04] Sam Jones: Caused all sorts of problems, didn't it? And just in time works when everything works and when it doesn't, one slight hiccup, but two or three.
[00:15:12] Steve Rose: No, very much. And certainly, so I mean we saw our trade cycle go out, by which I mean. How long were funding something like that? From the 60 to 80 odd days, that wasn't just the physical time to do the travelling.
[00:15:22] It was also because the harbours were busier. Ships that were supposed to be in place A were in place B. And the sort of things you normally hear at a train station for explaining why the train hasn't arrived, for explaining why the ship hadn't arrived. And,stock levels being held have definitely risen.
[00:15:36] I mean generally, I think if you look at the economy, there are lots of headwinds like that, which are making it more difficult. And then against that, you've got, those things which make, know, as technology marches forward and things get more efficient.
[00:15:44] And it's always the balance between the two, isn't it?
[00:15:46] Sam Jones: So what sort of additional technology is coming in to help with trade finance?
[00:15:50] Steve Rose: A really great, example I think I'll see is a client where I go to where, when they load the truck or the container that goes on onto the back of the truck, they now take a photo of the guy who's just loaded the truck in front of the truck with the doors open. The doors then shut, and then you've always got a photographic record to show whoever's on the other end. It was there when it left. They then put a little tag on the edge of the container that tracks where the container is. So you can always log on and see where the container is as it moves its way around the world.
[00:16:16] And that also acts as a confirmation whether the container has been opened, when it's on route. So you get that simple thing. That then drives onto a weigh bridge. That's automatically weighed. All of that data is automatically captured, put onto all the loading slips. I mean, at the moment that gets printed and generated out, but under the ETDA, you can exchange that automatically and we can see that.
[00:16:35] So you get all that kind of thing. So you can see the digital impact on that is actually having a dramatic impact. And then on the funding side,where we want to be, cause it's not live yet, but where we want to be able to exchange data using the, uh, the infamous blockchain. Which trade is an example of where a blockchain actually definitely does solve a problem because effectively it acts as a mechanism for both sides of a transaction to confirm the data and that they've both got the same thing.
[00:17:01] So when you're settling the charge, you're settling for the same thing. Probably the easiest way to put it. And then there was some really exciting projects underway at the moment to, um, well, exciting if you're an accountant, to digitize,bills of exchange and documents that have been around since the Venetians were taking ships across the Mediterranean.
[00:17:18] And they offer potentially very good ways of digitally funding transactions because, the whole reason the Blue Exchange was invented in the first place was so that a funder could easily break up a chunk of funding into little parts and then sell that on to other people as they wanted to.
[00:17:37] And if you can do that digitally, you can just imagine it will just feed straight intofunding arrangements that are much more flexible, and much easier to administer. So I think there is quite a lot of things happening actually on the digital side, which will actually make a big difference in the physical world, rather than the virtual world.
[00:17:52] Sam Jones: That's brilliant. So almost at the forefront of finance tech, really. We got a lot of fintech in the news and not really, they just got a jazzy website and a new algorithm. It's not really fintech as such, but that sounds like you'll be at the forefront of it and making things easier for both ends, clients, funders, vendors...
[00:18:10] Steve Rose: I mean, absolutely. I mean, obviously in a very little way, we don't have,dreams above our station. We know where we are in the financial environment. But you can certainly see,some of the largest, single facilities where a company has its supply chain finance.
[00:18:24] What do I mean by that? So where a big manufacturer has lots of people who supply it, and you can generally call that group of smaller companies the supply chain. So a big company will then, at the moment, the best way they've got of funding their transactions is to put all of those small companies into a,a financing arrangement where the company and there's a bank in the background and they're providing the funds.
[00:18:47] And then all the smaller companies are part of this arrangement with the big company. Now quite often you'll hear, if you're in the finance community, there'll be sort of like these big facilities and how wonderful they are, but they always miss out the bottom 25%. Which they just call us the tail.
[00:19:03] And they've never had a way of being able to deal with the tail. And the youngest sort of, so why not? And the reason is just, it's too expensive to do the tail. Because they're smaller transactions, it's much more difficult to do. Digitization offers a way of being able to come up with something where you can serve the tail.
[00:19:17] So it's trying to fill in those gaps. It'll always be the big banks and big institutions who solve the really big company's problems, but it's where you're trying to look at where people are operating without funding. And if, I think you're asking at the start, Tracy, about where trade finance fits in, because, you might sort of think, what do companies do now if they're not using trade finance?
[00:19:36] So most companies have to use an overdraft or use a mortgage or something like that to raise funds and then use that to support their trade activity. Where trade finance can help them, is in particular if they're looking to grow, then that bit of growth, that's the bit we can fund, and we can fund that on its own, and we don't disturb the mortgages, we don't disturb the overdrafts, all those arrangements stay in place.
[00:20:01] Whereas otherwise, if companies are having to use their overdrafts and their mortgages or whatever to fund the trade, then they can find themselves cash constrained. Their working capital gets sucked in to support the trade activity and they can never do it as a result. So it sort of fits back to that bigger picture of different funding products work for different customers in different situations, really.
[00:20:22] So if you're a company that wants to move goods across border, then trade finance is one thing you should look at. But there may be other options that fit your particular company.
[00:20:34] Sam Jones: Excellent. Thanks so much, Steve. I think that was a brilliant sum up of trade finance introduction to some of the technologies, how you can help clients moving products across borders. If anybody wants to find out more, the links to Tint Finance, The Smart team and Satellite Finance will be in the show notes on wherever you get your podcasts.
[00:20:51] Thanks very much and see you soon.