What is the difference between Trade Finance, Purchase Finance and Stock Finance?
In terms of working capital timing can be a crucial factor when trying to access funding. In the days of readily available overdrafts for businesses this was not a major issue. However, most businesses in the B2B space are now pushed towards invoice finance as a working capital solution. It is in fairness a very good solution for many businesses but you can only access the cash once you have delivered goods and then raised an invoice in arrears of that delivery. What if you need to access cash earlier in the trade cycle in order to pay suppliers? Let’s take a look at your options:
Trade Finance – this is an excellent solution if you are importing finished goods against confirmed orders. If your confirmed orders are from a credit worthy buyer a lender will pay your supplier for the goods against the INCO terms. Once the goods are with you they can be delivered and an invoice can be raised. At this point in your trade cycle the invoice finance facility will kick in and repay the trade finance facility. When your customer pays the invoice finance facility is repaid and the trade cycle is complete. This is a revolving credit facility that can be used all the time.
Purchase Finance – this can be used to pay suppliers where there is no confirmed order. In effect you will be bringing the goods in to stock. The availability this type of facility is reliant on your own financial performance and requires a credit insured limit being available against your own business. This is in contrast to trade finance which requires your customer to be credit worthy. It does allow for suppliers to be paid in full in advance. This why this is often referred to as Supplier Finance.
Stock Finance – this can be used to leverage funding against stock that is already in your warehouse. Typically it is only suitable for larger facilities where there is stock in excess of £1m. The calculation for stock funding involves the Net Orderly Liquidated Value (NOLV) which is calculated at a stock audit. In most cases you will generate 20-30% of the stock value. It needs to be linked with an invoice finance facility and you need a regular stock turn.