Trade Finance: How Credit Keeps Trade Moving

A manufacturer needs to pay suppliers and keep production moving, while the distributor buying its products may need 60 or 90 days to sell the goods and collect from customers.

The distributor may know it can sell the products, but tying up a large part of its working capital in a single order could limit what else the business can do. The manufacturer, meanwhile, may not want to wait months to get paid.

That gap between when one business needs to pay and when another business gets paid is one of the problems trade finance exists to solve.

What is trade finance?

Trade finance refers to the financial tools businesses use to support the buying and selling of goods, particularly when there is a gap between when money needs to be paid and when it will be received.

Consider a simple example.

A manufacturer receives a US$100,000 order from a distributor. The distributor needs time to sell the products and would prefer 60-day payment terms. For the manufacturer, waiting 60 days matters. There are suppliers to pay, another production run to fund, salaries and operating costs to cover, and potentially other orders waiting to be fulfilled. For the distributor, paying the entire US$100,000 upfront matters too. That money may also be needed to run the rest of the business. The trade makes commercial sense. The problem is that the two businesses need the cash at different times.

Trade finance can help bridge that gap.

Why does trade finance matter?

More sales do not always mean more available cash. In fact, growth can increase the amount of working capital a business needs.

Imagine a distributor that normally purchases US$30,000 of goods at a time. It suddenly has an opportunity to place a US$100,000 order because demand has increased. That's good news. But if the manufacturer requires payment upfront, the distributor now has to find an additional US$70,000 before it can take advantage of that demand. It could use its own cash. But putting US$100,000 into one transaction may leave less money available for salaries, inventory, marketing or other orders. It could also reduce the size of the order or walk away from some of the opportunity. Or financing can become part of how the transaction is structured.

For the distributor, that can mean being able to purchase more inventory without funding the entire transaction from its own cash. For the manufacturer, it can mean offering distributors more competitive payment terms without carrying the entire cash-flow burden itself.

That is why trade finance is not one product. Different transactions create different financing problems.

How does trade finance work?

The structure depends on what is creating the gap in the transaction.

Invoice Financing

A business has already supplied goods and issued an invoice, but payment is not due for another 30, 60 or 90 days. Rather than waiting until the invoice is paid, invoice financing can allow the business to access some of that money earlier. The problem being solved is simple: the sale has happened, but the cash has not arrived yet.

Purchase Order Finance

A business has an order to fulfil but needs money to purchase or produce the goods required to complete it.

For example, a distributor may have customers ready to buy US$100,000 of products but not want or be able to fund the entire purchase upfront.

Purchase order finance can provide funding against that transaction, allowing the business to complete an order it might otherwise have to reduce, delay or turn down.

Financing distributor purchases

There is another common situation. A manufacturer wants to be paid earlier, while its distributor needs more time to pay. Financing can sit between the two. The manufacturer receives payment according to the agreed structure, while the distributor gets additional time to repay the financed portion of its purchase. This is particularly useful where a manufacturer has distributors capable of selling more product but whose order sizes are constrained by available working capital.

It is also the kind of gap Yala Trade Finance is designed to help address. Yala can finance part of an approved distributor's purchase from a manufacturer, allowing the distributor to put its available cash towards the order and finance the balance.

For manufacturers, that can mean helping distributors purchase more without simply extending longer payment terms themselves. For distributors, it can mean putting less of their own working capital into a single purchase.

Speak to our Trade Desk to learn more about Yala Trade Finance.

Trade shouldn't stop because Of the Money timeline

That is ultimately what trade finance is about.

A manufacturer may want to sell more without waiting months to be paid. A distributor may have demand for more products without having enough cash available today to fund the entire purchase. Another business may have completed a sale but still be waiting for an invoice to be paid.

The underlying business opportunity can be sound in each case. What is missing is the financing structure that allows the transaction to happen.

In this series, we'll break down the different forms of trade finance, how they work, when they make sense and the business problems they can help solve.

Coming next:

Purchase order finance, explained

Invoice financing, explained

Upfront payment finance, explained