Trade finance is an umbrella term for finance tools which include any assets, investments, cash which can be used to facilitate trade. According to Investopedia, trade finance can be described as the financial instrument that is used by companies to facilitate trade. Trade finance also makes it easier for exporters and importers to do business through trade.
Trade finance provides exporters with payment as per the agreement and provides the importer an extended credit to fulfil the trade order. The purpose of trade finance is to introduce a third party to ensure that there is less payment and supply risk. The parties involved include banks, trade finance companies, importers and exporters as well as insurers.
Trade finance is mostly used to protect against risks associated with international trade such as currency fluctuations and political instability. Most conventional financing is used to manage liquidity and solvency of companies. Introducing invoice financing to trade finance could be extremely beneficial to exporters.
Invoice financing is basically short-term borrowing extended by a lender based on the company’s unpaid invoices. Most wholesale retailers sell to their customers on credit. Introducing credit options might tie up funds which could have been used to grow the company’s operations. Invoice financing is used to solve cash flow issues for retailers and manufacturers. By bridging the gap between trade finance and invoice finance, retailers can not only avoid risks associated with international trade, but they can also curb cash flow issues in the company.