Is there a difference between trade finance and trade credit? Well, these terms confuse many people, which is why they are often used interchangeably. In this article, we will explain the difference between trade finance and trade credit. We will also explore the advantages of trade credit and why it’s favourable for small-scale exporters and importers.
What is Trade Finance?
Trade finance refers to financing solutions that help exporters, importers, and other businesses accomplish domestic and foreign trade. In a nutshell, trade finance is a broad term for financial products facilitating international trade.
Some of the most common types of trade finance include:
- Cash Advances – an unsecured payment of funds to the seller before the goods are shipped. Since it is unsecured, it can be a risky invoice financing option for the buyer as the seller may delay or fail to send the products.
- PO Finance – a purchase order allows a financier to pay for goods and services and obtain the repayment from the buyer.
- Term Loans – term loans include overdrafts and can be a sustainable source of finance. Usually, they are backed by guarantees and securities.
- Receivables Discounting – you can sell bills of exchange, post dated checks, and invoices at a lower price than the value of the invoice.
- Trade Credit – A cheap arrangement between the buyer and seller based on the trust between the two parties.
Understanding Trade Credit
Trade credit is a business financing agreement between the exporter and the importer or buyer and seller. It is a short-term financing solution that’s interest-free and does not entail engaging the two parties’ financial institutions. However, it is advisable to take a trade credit insurance policy to mitigate risks arising from the buyer’s payment default, insolvency, or bankruptcy.
Trade credit allows clients to buy goods and services and pay the supplier later. The supplier and the buyer commonly agree to use “net 30” or “net 60” payment terms. For instance, a “net 30” invoice terms reveal that the customer has a month (30 days) to clear the outstanding debt. Trade credit financing allows businesses to improve working capital and cash flow and settle accounts payables efficiently.
The customer can pay immediately or wait if they require more time to acquire the funds to finalise the transaction. This way, trade credit becomes an essential part of the supply chain and an important aspect of almost all international trade undertakings.
Benefits of Trade Credit Insurance in Trade Credit Arrangements
Trade credit is a straightforward and flexible business financing solution. However, importers and exporters are exposed to different risks since many factors can affect the customer’s ability to make payments.
A trade credit insurance company allows you to mitigate the risk of extending a line of credit. The supplier receives payment from their insurer for the accounts receivables based on the terms and conditions of the policy.
Contact Niche Trade Credit to Discover More
With more than 15 years in the insurance industry, Niche Trade Credit has what it takes to offer the advice you need to safeguard your business. Contact us now to learn more about the ins and outs of trade credit insurance solutions and trade finance.
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