Trade Finance, Debtor Finance, Supply Chain Finance
Trade Finance is utilised both domestically and internationally. Businesses typically use trade finance to purchase stock from suppliers and then repay this facility when they have sold their stock. For example, a retailer may purchase its goods from China or Europe. The goods are manufactured over a six-week period and then are shipped to Australia in a time-frame of another six weeks.
The supplier of the goods may require fifty percent of the order amount paid upfront, with the remaining fifty percent paid when the goods are loaded on to the ship. As the business has not sold its goods yet, they require financing to help pay for the stock.
Trade finance facilities allow a business to pay for the goods and then have around 180 Days to repay the loan. This provides enough time to have them manufactured, shipped and sold.
Trade finance can also be used where a business requires equipment but it too is being built by an overseas (or domestic) supplier and progress payments for the equipment need to be made. A trade finance facility is used to draw down multiple progress draws (just like a house construction) to pay the manufacturer. When the equipment arrives in Australia, a Chattel Mortgage facility is drawn down to finance the amount and the Trade Finance loan is repaid.
Debtor Finance is a facility that is provided against the value of the invoices your business has outstanding with its customers. In other words, you are drawing down against money that is owed to you.
Debtor Finance is useful for growing companies and those that that operate in a business environment with short term operating costs but long collection cycles. Imagine a labour hire company as an example. The company must pay it’s employees on a weekly basis, but may not be paid by its own clients for 30 or 60 days. By access debtor finance, the company can issue an invoice of say $100,000 with payment due in 30 days and draw down up to $80,000 of this money within 24 hours to pay its operating costs.
Debtor Finance on average is provided at 80% of the face value of the invoice. Debtor Finance is known as Invoice Finance, Factoring and some other terms such as Line of Credit against Debtors.
For each of these, they are simply a way to advance money to the business against the money owed to it.
Supply Chain Finance
This can take the form of a multi-use facility. Businesses can take on loans to extend their own creditor supply terms. Facilities like these offer limits based on the business turn over and are split between different types of loans. These include the ability to pay your creditor (money you owe) invoices and then pay off this loan over six or nine months. Part of your credit limit can be used to draw down against your own invoices (debtor finance) and the residual is a cash advance limit which can be used to for any expense – think credit card cash advance.