What are the main differences between Trade Finance and Supply Chain Finance?

 The main differences between Trade Finance and Supply Chain Finance:

Some of the main differences and distinctions between TF and SCF can be illustrated in the following points:

Trade Finance:

Trade finance refers to the financing and management of trade activities, such as importing and exporting goods or services, both domestically and internationally. It involves providing financial support to facilitate smooth and efficient trade transactions between buyers and sellers.

 

Trade finance encompasses various financial instruments and services that help mitigate the risks associated with international trade, boost liquidity, and enhance trust between trading parties. These instruments may include letters of credit, bank guarantees, trade loans, export credit insurance, factoring, and forfaiting.

 

By leveraging trade finance, businesses can bridge the gap between the time of fulfilling an order and receiving payment, ensuring uninterrupted cash flow. It facilitates access to working capital, reduces the financial risks of non-payment or default by counterparties, and allows for the optimization of cash flow cycles.

 

Supply Chain Finance:

Supply chain finance, also known as supplier finance or reverse factoring, is a financial solution that enables businesses to optimize their supply chain management and improve cash flow efficiency. It involves collaborating with financial institutions to extend financing options to suppliers, allowing them to receive early payments on their outstanding invoices.

 

In supply chain finance, the buyer and the financial institution work together to create a mutually beneficial arrangement. The financial institution assesses the creditworthiness of the buyer instead of the supplier. This allows suppliers to access funds much earlier than the agreed payment terms, bridging the gap between the supply of goods or services and payment.

 

By offering early payment options, supply chain finance improves the financial stability of suppliers, reduces their reliance on external financing, and minimizes working capital requirements. It also enhances the buyer-supplier relationship by providing suppliers with a reliable and efficient source of liquidity.

 

Overall, supply chain finance benefits both buyers and suppliers by optimizing cash flow, minimizing financial risks, and strengthening the overall resilience of the supply chain.

Some other differences between both SCF and TF can be summarized as below:-

• Supply Chain finance is relatively new and was adopted by many finance providers to refer to a very single and narrow payables finance product

• Trade finance can be referred to the intermediation by banks through the control of the shipping documents related to the underlying goods or services.

• Supply chain finance is primarily finance solution, while trade finance can incorporate finance, payment and risk mitigation techniques.

• The level of the banks intermediation ( payment, finance and risk mitigation) in trade finance is more likely higher than in supply chain finance. In trade finance the bank can incorporate all these elements through the control of the shipping documents related to the underlying goods or services.

• The banks intermediation in supply chain finance is relatively lower than in trade finance, due to the limited role of the bank in only making the payment. Also, supply chain finance was developed in the open account space where the role and intermediation by banks is limited to making the payment.

• Transactional security ( control of the goods, title to the goods, security interest) in Trade finance is higher than in Supply Chain Finance through the control of the shipping documents related to the goods or services

• transitional security in supply chain finance is low due to the lack of the banks intermediation which is only limited to making the payment and can be restricted to exercise a security interest

• The basis of the funds availability for trade finance is transactional basis

• The basis of funds availability in supply chain finance is cash-flow based

• Trade finance solution provides pre-shipment and post-shipment finance, while supply chain finance is restricted to post-shipment finance

• Supply chain finance is restricted to be based on invoices.