Trade Finance and Corporate Finance: What’s The Difference? | Czarnikow
Trade Finance and Corporate Finance – they’re terms you’ve probably heard a lot but if someone asked you to explain the difference, would you be able to? For those of us without a business or finance background or who are new to the commodities or financial sector, it might seem easier to keep quiet. In reality though, the differences between the two practices are easier to spot than you might think. We’ll take you through an explanation of both, and hope to dispel any confusion between the two.
Imagine you are a small mill in Thailand. In order to increase your business’ size and assets, you need to find investment that will allow your company to grow and prosper, creating value to the shareholders. You do not have a vast relationship with banks at present, as your business is still growing, and you do not have a network of investors that might be willing to co-invest with you. This is where Corporate Finance can help, by giving you a clearer view of your current situation and a range of options that you can pursue in order to flourish.
The aim of Corporate Finance is to maximise the value of a business to its shareholders, by providing creative financial solutions addressing the company’s needs and appropriate capital structure (debt and equity) for each situation. It is provided as a service to our clients, and Czarnikow’s role in the process is to elaborate on, conduct and conclude those financial solutions. A few examples of these solutions are equity raising from strategic investors, new credit lines from funds and financial institutions, debt restructuring and M&A (buying or selling assets).
So how does it work?
When Czarnikow starts working with a client, we first have to collaborate with them to understand their current position and objectives, through market and project analysis. We do this by running a cash flow projection and valuation of a specific project and the entire company. Once we’ve done the analysis, we are in a position to be able to propose different solutions and implementation strategies and, if applicable, generate marketing materials to run a coordinate process . We create a list of potential investors and/or financiers, which varies depending on the client and situation, and start exploring whether they’d be interested in exploring the opportunity. Once we have piqued some interest, we can share information on a confidential basis and present the opportunity to them, backed by a detailed information memorandum put together by our team. We coordinate and advise in the entire process, from the strategy definition, negotiation with investors up to transaction closing.
Let’s look at our example in more detail:
- A small Thai sugar mill wants to grow their business by building something new (a greenfield project).
- To do this, they need to analyse the project’s financial feasibility and raise funds on the best capital structure;
- We run a complete cash flow projection at the project and company levels in order to suggest viable solutions;
- We evaluate with the management and shareholders the best way to implement the project, from raising equity from strategic investors to long term debt from banks and Multilateral Financial Institutions;
- Czarnikow then runs a coordinate process to maximize the project value, raising equity from the most competitive investor, analysing the combination of value, strategic alignment and governance;
- The company is then able to apply the fresh capital in its greenfield project implementation
This fund could have been partially or fully raised by using new credit lines directly from a multilateral financial institution, bank, fund or another potential financier.
In summary, by understanding the client’s needs, Czarnikow works to present and implement the best solution, considering equity (mergers & acquisitions, joint-ventures and strategic partnerships) or debt (credit lines with banks, funds, capital markets or current debt restructuring) from our vast specialized global network of investors and financiers
Importantly, in all of these scenarios, Czarnikow acts exclusively as an advisor to connect and structure our clients financing needs, without actually providing the funds/capital from our balance sheet.
So now we have a high level understanding of Corporate Finance, what about Trade Finance? Trade finance makes it possible for exporters and importers to trade, and as such is an integral part of our business. It helps support trade by providing the financial resources which are needed to facilitate the movement of goods across the world, and can be used by anyone who has a payment gap between providing goods or services and receiving the final payment. The reason trade finance is needed is because there are risks at all stages of the trade, and these need to be mitigated as effectively as possible.
Imagine you are a small business making your first large shipment. How are you going to ensure you have enough money to cover the costs of manufacturing this order once you’ve paid for the raw materials? It is likely that you will not be paid for your final goods for a long time after purchasing the raw materials, and you will also have very limited access to funds/banking lines and other interim financing. A confirmed order is not always sufficient to sway a bank to agree to extend an overdraft facility at the time that it is required.
There are difficulties for larger businesses too – imagine you are waiting on a delivery of a large quantity of goods. You don’t want the risk of having to part with your money before you receive your goods, which can at times take two to three weeks to arrive, and then have to clear and store it until it is required for production. On the other side, the supplier also won’t want to wait for delivery to be complete to receive payment in case they do not receive them – as you can see, it’s difficult for all sides.
That’s why trade finance is needed to help mitigate the risk of non-payment for the supplier and non-receipt of the goods for the buyer, and allow cash flow to cover the efficient movement of goods. It accounts for over 80% of global trade per year, proving itself to be indispensable.
So how does it work?
Trade finance instruments are used to reduce/eliminate risk, allowing clients to access the funds they need to trade, when they need them. Banks and other financial institutions facilitate the transactions between an importer (buyer) and exporter (seller) by financing the trade, allowing the trade to go ahead even when a client hasn’t access to cash funds to do the deal themselves.
Czarnikow can ensure that trades are safe, effective and secure by taking control of documentation and financial elements, keeping a close eye on the trade and ensuring security in terms of goods delivery (receivables). Our strong relationships with banks allow us to have very quick and efficient workflows to process these credit facilities, meaning that we can give fast access to advance funds for our clients through our own borrowing facilities. This also means that, in contrast to our Corporate Finance services, Czarnikow is directly involved in trade flow and provision of the funds, rather than just providing an advisory role. Furthermore, in contrast to Corporate Finance, these funds are typically provided on a 180 day repayment period or shorter, making it a funding process with a much faster turnover than the deals set-up by our Corporate Finance team.
- Aims to maximise the value of a company to its shareholders
- Implements equity and debt solutions
- Does not employ Czarnikow’s balance sheet
- Typically for long term capital solutions
- Finances the trade of goods
- Uses banking lines
- Uses Czarnikow’s balance sheets
- Most financing is provided for a shorter time frame
We hope you would now feel more comfortable explaining the difference between Trade Finance and Corporate Finance. We will be sharing more in-depth articles on each in due course.
Author: Carys Wright, Content Writer