Difference Between Supply Chain Finance and Trade Finance

There are many ways a business can get finance, but what matters is how fast and easy it is to get a business loan rather than which lender you get it from. In this post we will analyses two of the fastest business finance options and how they compare to each other.

Supply chain finance:

It is a kind of invoice factoring, but in contrast to basic factoring, in supply chain finance the initiative is not by the supplier, who would have presented their invoices to the factor to be paid earlier under basic factoring.  In this case, the customer or the ordering party starts the process by selecting the invoices they would like to be paid early to the supplier. After that, the supplier also has the option to pick and choose the invoices he would like to encash thought the factor. So, in supply chain finance, all three parties need to work in collaboration instead of working in separate silos.

Trade finance:

This type of business finance requires an understanding between the seller and buyer and their respective financial institutions (bankers). While a seller may want the buyer to prepay for products and services but at the same time the buyer would also like to reduce the risk by requiring documentation for the goods shipped. Here, the bank or a financial institution can assist the two parties by providing support in form of letters of credit which can be encashed upon the presentation of documents like the bill of lading. Also, as a part of trade finance, the seller’s bank can approve a business loan based on the trading contract.

Which is the better form of business finance?

Supply chain finance is the better option for getting a easy business loan because of the simplicity of the contract involved. Where trade finance will require a lot of negotiations due to the sheer number of parties involved, supply chain finance is a straightforward collaboration between the supplier, the buyer and the factor.

Another benefit of supply chain finance is that a business can select their critical suppliers and pay them early to ensure a smooth running of operations at either end. The business benefits from the timely delivery of raw materials and essential goods whereas the supplier gets the working capital needed for servicing future orders.

Getting supply chain finance in India

If you would like to explore the possibilities of getting supply chain finance for your SME, get in touch with us at LivFin. We are a non-banking financial company specializing in very short-term credit for buyers and suppliers. We also offer working capital loans to help strengthen your operational capabilities. To know more, write to us at care@livfin.com.