Trade finance makes the world go round. B2B transactions rely on trade finance tools and mechanisms to find working capital options they need. Business success often depends on making purchases without tapping your own treasury.
And, trade credit is the trust handshake between businesses. Imagine you’re buying supplies for your business but instead of paying cash upfront, the supplier says, “Don’t worry, pay me later.” That’s the simplest trade credit definition!
What are some types of trade finance?
Trade finance comes in many forms and caters to the diverse needs of businesses, especially in the context of international trade.
Each type of trade finance has its place, depending on the business’s needs, the industry, and the relationship between the buyer and seller. It’s all about finding the right fit to keep the business moving smoothly.
Now, let’s break down the different kinds of trade credit and financing tools, methods, and mechanisms you might encounter – in alphabetical order:
Advance payment guarantees
A guarantee provided to a buyer that an advance payment will be returned if the seller does not meet their contractual obligations.
Bank guarantees
A bank guarantee is a promise from a bank or other financial institution that if a particular borrower defaults on a loan, the bank will cover the loss. This can be used in trade transactions to guarantee payment or performance.
Banker’s acceptance
Used in international trade, it’s a promise by a bank to pay the amount at a future date. The seller can use this as a guarantee of payment or sell it for immediate cash.
Consignment
The supplier sends goods to the buyer but retains ownership until the goods are sold. The buyer pays only for what sells, returning what doesn’t.
Countertrade
A form of trade where goods and services are paid for with other goods and services, instead of traditional currency. This can be useful in situations where foreign currency is scarce or where countries want to balance trade.
Documentary collection
A bank acts as an intermediary without accepting any financial risk. The bank releases shipping and title documents to the buyer once payment is received or a promise of payment is made.
Export Credit Agencies (ECAs)
Government or quasi-governmental institutions that provide guarantees, insurance, and sometimes financing to encourage export activities. They can help businesses secure loans or provide direct financing to facilitate overseas sales. For example, Credendo in Belgium.
Export credit insurance
Protects exporters against the risk of non-payment by foreign buyers. This insurance can cover commercial risks (like bankruptcy) and political risks (like war).
Factoring
A type of trade credit to get cash up front, a business sells its invoices to a third party, called a factor, at a discount. A business sells goods/services to their customer on credit terms, generating an invoice. Instead of waiting for the customer to pay, the business sells this invoice to a factor.
The factor pays the business a significant portion of the invoice value upfront, say 70% to 90%, providing immediate cash flow. The factor then takes on the responsibility of collecting the full payment from the customer. Once the customer pays, the factor gives the remaining balance to the business, minus a fee for the service.
There are two main types of factoring:
- Recourse factoring: If the customer doesn’t pay the invoice, the business must buy it back from the factor. The risk of non-payment stays with the business.
- Non-recourse factoring: The factor assumes the risk of non-payment. This is more expensive but can be worth it for the peace of mind it offers.
Forfaiting
Similar to factoring, but typically used for larger international transactions. The exporter sells their medium to long-term receivables at a discount to a forfaiter, who assumes the risk of non-payment. This is usually without recourse to the seller.
Letter of credit
More formal, often used in international trade. A bank guarantees payment to the supplier on behalf of the buyer, provided certain conditions are met. This type of trade credit is a safety net for both parties. Find out also about Standby Letters of Credit.
Open account trade credit
This is the most relaxed kind. You get the goods or services now and pay within a set period, say 30, 60, or 90 days. No formal financial instruments are involved.
Performance bonds
Issued by a bank or an insurance company to guarantee satisfactory completion of a project by a contractor. If the contractor fails to fulfil their obligations, the bond provides financial compensation to the client.
Revolving credit accounts
Think of it as a credit card for businesses. You have a maximum limit, and as long as you pay, you can keep borrowing up to that limit. It’s flexible and reusable.
Seasonal credit
Tailored for seasonal businesses that might need more inventory at certain times of the year. You get terms that match your cash flow cycle, helping you manage high season stock without immediate payment.
Supply Chain Financing (SCF)
A set of solutions that optimise cash flow by allowing businesses to lengthen their payment terms to suppliers while providing the option for their suppliers to get paid earlier. This is often facilitated by a third-party financial institution that relies on the creditworthiness of the buyer.
Supplier credit with retention of title
Here, the supplier retains ownership of the goods until they’re fully paid for. If the buyer can’t pay, the supplier takes the goods back.
Trade promissory notes
A written promise to pay the supplier by a specific date. It’s more formal than an open account and legally binding.
These trade instruments and mechanisms are designed to mitigate various risks associated with trade, such as credit risk, currency fluctuation, political instability, and non-payment. By choosing the appropriate type of trade finance or credit, businesses can secure their transactions, optimise their cash flow, and expand their operations into new markets with increased confidence.
Trade finance with Buy Now, Pay Later for B2B?
Buy Now, Pay Later (BNPL) for B2B is quickly finding a place in the trade finance world. BNPL is an innovative twist on a concept that’s been booming in consumer markets. It allows businesses to purchase goods or services immediately and defer payment to a later date, often without interest if paid back within a short period.
This trade finance model is gaining traction in the B2B sector and offers several benefits:
Improved cash flow
Businesses can preserve their cash for longer periods, helping them manage their operational expenses more effectively.
Increased purchasing power
BNPL solutions can enable smaller businesses to make larger purchases than they could otherwise afford upfront, facilitating growth and scalability.
Flexible payment terms
Unlike traditional trade credit, BNPL for B2B often comes with more flexible repayment options, tailored to the buyer’s cash flow situation.
Quick and easy access to credit
Many BNPL providers offer streamlined, digital application processes with rapid approval times, reducing the bureaucratic hurdles of traditional trade finance.
Enhanced buyer-seller relationships
By offering BNPL, suppliers can enhance their attractiveness to potential and existing customers, fostering loyalty and increasing order volumes.
Payment collection and late payments
A good and reliable BNPL service will also offer to take on the payment collection responsibilities, including chasing down late payments.
Categories of BNPL for B2B
BNPL for B2B can vary in structure but generally falls into a few typical categories:
- Short-term BNPL: Similar to consumer models, offering payment deferment for 30 to 90 days.
- Instalment BNPL: Allows businesses to spread payments over several months, often tailored to the buyer’s cash flow cycle.
- Invoice Financing BNPL: Where the BNPL provider pays the invoice upfront to the supplier, and the buyer repays the BNPL provider on a set schedule.
BNPL is emerging as a valuable tool for facilitating trade, especially in industries where large, upfront costs can be a barrier to purchasing. It helps businesses stay competitive and agile in their operations, all while managing their finances more effectively.
Where can I find a high quality BNPL service for B2B?
Look no further! You’ve just found Terms.Tech, a European flexible payment terms solution helping business customers improve cash flow and grow sales. Terms.Tech delivers BNPL services for any business need, from one-click checkout to custom solutions for complex B2B platforms. Where other BNPL services may be limited by geography, Terms.Tech is available throughout the entire EEA and Switzerland.
Set up a meeting to use Terms.Tech as your company’s trade finance tool!
