Trade finance vs invoice finance

In one paragraph

Trade finance and invoice finance sit on opposite sides of the same trading cycle, and importers and exporters frequently use both together rather than choosing one over the other. Trade finance funds the purchase side — paying or guaranteeing payment to a supplier before goods are sold on — commonly through a letter of credit or purchase order finance. Invoice finance funds the sale side, advancing funds against invoices issued to customers once goods or services have been delivered, ahead of the customer actually paying. A business buying from overseas suppliers and selling on trade terms domestically often needs a facility on each side of that gap to keep working capital flowing through the whole cycle.

Side by side

When trade finance wins

Trade finance wins wherever the immediate problem is paying an overseas or domestic supplier ahead of receiving payment from the eventual customer, particularly for a business without an established credit relationship with that supplier, where a letter of credit or similar instrument substitutes the lender's standing for the buyer's own. It is the more natural fit for funding a specific purchase order or shipment, especially for a newer importer without the trading history to negotiate open account terms directly with suppliers.

When invoice finance wins

Invoice finance wins once goods or services have been delivered and the business is waiting on customer payment terms to run their course, converting outstanding invoices into available cash rather than waiting the full payment period. It is the better fit for a business whose constraint is the sales side of the cycle — strong orders and deliveries, but cash tied up in receivables — rather than the purchasing side.

Coordinating trade finance and invoice finance together requires the same lender, or at least lenders willing to work alongside one another, to have visibility into both sides of the cycle, since a facility funding the purchase of stock needs to understand what will happen to that stock commercially, and a facility funding the resulting receivables needs to understand where the underlying goods came from and how they were financed. Businesses new to importing sometimes underestimate how much documentation each instrument requires, from bills of lading and certificates of origin under trade finance through to individual invoice and proof-of-delivery evidence under invoice finance, and building this administrative capability early avoids delays once volumes grow. Exchange rate exposure is a further practical consideration specific to trade finance that does not arise under invoice finance in the same way, since the purchase side of an import transaction is typically priced in a foreign currency while the eventual domestic sale is in Australian dollars, and a business running both facilities together should have a clear view of how currency movements affect its margin across the full cycle. As trading volumes grow, some businesses eventually consolidate both facilities with a single lender experienced across trade and invoice finance, simplifying reporting and giving that lender a fuller picture of the business's overall working capital position than either facility would provide in isolation.

Can you use both

Yes, and for many import-and-resell businesses this is the standard structure — trade finance funds the purchase of stock from an overseas supplier, and invoice finance funds the receivables generated once that stock is sold on to domestic customers on trade terms. Structuring both together requires a lender or panel comfortable assessing the whole cycle, since the two facilities interact directly: stock funded through trade finance becomes the inventory behind sales that invoice finance later funds.

Related

Trade finance · Invoice finance · Letter of credit · Factoring