Trade Finance or Supply Chain Finance refers to finance that is used to finance the trade of goods or services. Trade Finance can be used to describe financing of imports or purchases (called Import Finance or Inventory Finance) or alternatively to describe the financing of exports (called Export Finance or Purchase Order Finance).
Trade finance is a form of working capital finance. It is used to bridge the funding gap between the borrower buying their stock and selling their goods to their customer. In the case of Export Finance or Inventory Finance, the borrower will typically have a purchase order from their customer to support the finance application. In the case of Import Finance or Inventory Finance, the borrower has typically identified the stock they wish to purchase but may not yet have a purchase order from a customer.
Typically for Import Finance or Inventory Finance, the lender will fund the purchase of the stock and require repayment either at a single point in time or over a short amortisation period. It is common for Import Finance and Inventory Finance facilities to have relatively short durations that are no longer than the working capital cycle of the business (e.g. 90 to 120 days).
Typically for Export Finance or Purchase Order Finance, the borrower will have an order from a customer. The Purchase Order Finance or Export Finance is used to fund the working capital required to manufacture and or ship goods to the customer. As with Import Finance and Inventory Finance, these facilities are usually short term in nature and match the borrowers’ working capital cycle.
In the case of Import Finance or Inventory Finance the lender will need to see the Purchase Order you have issued to the supplier as well as the invoice issued by the supplier to you. If the goods are being purchased internationally then the lender will also need to see insurance documentation as well as shipping documentation (including a Bill of Lading). It is common for the lender to pay the supplier directly and this is sometimes done in tranches – deposit payment upfront and full payment once goods have cleared customs in the international port. The lender typically takes ownership or security over the goods while they are in transit.
In the case of Export Finance or Purchase Order Finance, the lender will need to see the Purchase Order. The lender typically takes security over the goods while they are in transit.
There are a wide range of costs to Trade Finance and Supply Chain Finance Facilities. The financing cost will vary depending on the riskiness of the transaction, the risk of the counterparties and the duration of the facility.
As Trade Finance is a working capital facility, alternatives include Business Overdrafts and Invoice Financing facilities. Business Term Loans can be used as an alternative is the Business Term Loan is short term in nature and have the flexibility to all redraws as well as early pay offs.