Hommocks | Trade Finance
A timing difference always exists between when a product is delivered and when a payment is made (unless when paid in cash). Trade finance intermediates and moderates this timing gap. This timing gap can be from a few days up to multiple years. Trade finance's deal duration occurs during this timing gap period, typically within 120 days.
Trade finance can be used by a Seller such as in receivable finance, inventory finance or pre-export finance. By a Buyer, payable finance can be used. By both a Seller and a Buyer simultaneously, documentary letter of credit can be used.
Unlike a corporate loan in which two parties (borrower and lender) are engaged, trade finance requires three parties (seller, buyer, and lender).
The Seller's main interest is to receive payment safely on the shortest possible payment term. The Buyer's main interest is to receive non-defect goods on the longest possible payment term. Trade finance moderates these two differing interests.
The Borrower of trade finance achieves better working capital management and increased efficiency in short term assets (receivables and inventory) and liabilities (payables). The Borrower also can mitigate counterpart risk.