What is trade finance? is it different from supply chain finance?
A trade finance loan company provides funds to help businesses cover costs starting from production to shipping their products to an international buyer. It is obtainable before you receive any payment from the end buyer. Documents related to distribution and payments are vital proofs to take forward the business transaction with minimum risk.
This effective funding solution lets the exporter handle the payment process-related risk. On the other hand, it is a profitable deal for importers as it helps them manage the supply risks. The trade finance lenders in the UK decide the borrowing limit by looking at the following aspects related to business:
- Financial stature
- Business profitability
The various types of trade finance instruments employed by importers and exporters are:
Purchase order finance: Procure it from the finance provider as an advance to pay your supplier. It provides a great way to support business cash flow. Getting 30% to 70% of the purchase order amount is possible with this option. Despite limited capital, sales growth will not suffer as you can arrange more inventory.
Stock or warehouse finance: This funding supports holding goods in the warehouse on behalf of the seller till it reaches the buyer. A third party will support it. This funding is a common form of supply chain instrument.
Structured commodity finance: It is a financial arrangement exclusively designed for companies that are at the producing end. This financing specialises in commodity-based trading. Businesses working around developing markets can take advantage of this funding solution.
Discounting and factoring: Here, the exporter will sell the invoice to the financer at a discounted price. After that, the importer will pay the full price for it to the financer. As a small business, you can have the upper hand by utilising this asset-based finance as discounting against outstanding invoices and factoring against unpaid invoices.
Payable finance: Reverse factoring is the other name of this finance. The business will get the opportunity to extend the payment term with the supplier. This is another short-term borrowing opportunity to help ventures keep up with the cash flow.
Letter of credit: A written letter of promise from the bank to the exporter. It says the bank will complete the payment once the transaction ends. Businesses can also explore sub-categories like commercial letters of credit, standby letters of credit, transferable letters of credit, back-to-back letters of credit, etc.
In the UK, trade finance lets you handle the funds' requirements at the start of the supply chain. On the flip side, supply chain finance is funding buyers will receive from the suppliers to purchase raw materials or inventories.This funding arrangement can be used along with invoice financing.