Trade and export finance are sometimes used interchangeably. However, it is important to explain the distinction and how the terms are used.
Trade finance is a term universally used for financing both imports and exports. In many mediums this will encapsulate invoice finance, purchase order finance, off balance sheet lending, letters of credit and similar funding instruments. Trade finance is usually spoken about in reference to cross border trade. However, it may also be domestic trade. It is commented on by many as being seen as a financing mechanism which is not well known in the market, but by having purchase orders and suppliers – there is a way of financing a trade through the use of a lender’s funds. This allows a business to have enormous growth based on facilities to complete their trade cycle. For those trading entities that require an element of holding goods (not sent directly to end consumer); a funder may be able to finance stock within warehouse.
In the event that a trade finance facility can be created to migrate cash away from the stock and trade cycle, to be used for working capital and day-to-day cash management; then there can be amazing results. The reason for this is understanding trade cycles and where funding should be apportioned within the cash flow cycle. We have seen companies that use their free cash flow for all parts of their business, which restricts growth. By using the correct facilities and creating a stand-alone cycle; then equity in the business can sit separately (to a large degree). In this case, the level of equity funding that one may thought was needed is not actually required and thus new investors diluting equity or a further capital commitment of existing shareholders can be better utilised elsewhere.
Export finance is perceived as a part of trade finance, where goods are financed in order to export. An example of a type of export finance is a cash advance used for manufacturing goods made for export; which could be a deposit from the buyer. It may also be a letter of credit that is required, when goods are transported cross border to new buyers. In order to make sure they are paid for (and conversely, released); this is usually done by way of checks or Letters of Credit in place. By using these bank instruments it allows trust to build up between parties and facilitate trade.
We usually refer to export finance when seeing goods that flow cross border out of a country or within country to an end buyer.
What goods can be bought and sold using for export finance?
The financed product is not limited to the above list, but many alternative lenders usually would like to see ‘finished goods’. We usually use trade finance as an all-encompassing term for many product types and buyer/seller trade. Conversely, export finance is limited to trade finance instruments being used for an export or seller type transaction.