Differentiating Trade Finance from Supply Chain Finance

Trade and supply chain financing offers innovative solutions for the working capital shortage experienced by expanding businesses. By expediting cash flows, providing financing, shortening the end-to-end trade cycle, and enhancing financial ratios, they can help organizations reach their full potential. Additionally, they lower counterparty and various other risks in cross-border transactions. This blog post will examine the significant distinctions between traditional and supply chain finance solutions.

Supply Chain Finance Versus Conventional Trade – An Overview

Traditional trade- Time-tested practices

Documentary trade, also referred to as traditional trade, has a long history. In order to simplify the exchange of funds for shipping documents, banks serve as intermediaries. This type of trade financing is centered on financing for transactions and shipments, risk management, and payment for the underlying transactions between buyers and sellers. It’s a time-tested approach that has been used for ages.

Also Read: How Supply Chain Finance Solutions Benefit Buyers & Vendors

Supply chain finance- A modern approach

Supply chain finance is a more modern strategy. It relies on deals, warranties, and representations made between the parties to the transaction and operates with less bank intermediation. The buyer’s promise to pay or the supplier’s entitlement to payment on an open account are common focal points of transactions. A crucial element is risk mitigation, which is accomplished through a variety of mechanisms like third-party involvement and risk-sharing. Surprisingly, around 90% of trade transactions are completed on terms associated with open accounts, which gives supply chain finance plenty of room to flourish.

Working Capital Solutions With Traditional Trade and Supply Chain Finance

Understanding the cash conversion cycle (CCC)

We must first comprehend the Cash Conversion Cycle (CCC) in order to realize how traditional commerce and supply chain finance provides working capital solutions. The transition in a business from cash outflow to inflow is covered by this cycle.

As previously mentioned, before collecting payment from clients, a business pays vendors and goes through the lead time, management of inventory, and receivables phases. The time required for each phase determines how long the cycle will last. For a business to grow, this cycle must be reduced, and turnover must be increased.

Solutions

Standard trade and supply chain finance solutions seek to:

1. Offer financing choices: Both provide financing choices to assist different phases of the trade cycle.
2. Increase payable days (DPO): Increasing the time for paying bills effectively helps manage cash flow.
3. Reduce lead time: Improving efficiency through the trade process’ streamlining of lead times.
4. Reduce inventory days (DIO): Improving inventory control lowers holding costs.
5. Reduce receivable days (DSO): A quicker turnover of receivables enhances cash flow.
6. Reduce risk: Risk reduction techniques are provided by both options.
7. Improve balance sheet ratios: Improved financial ratios improve the organization’s financial stability.
8. Payment collection: Ensuring fast payment collection helps to maintain liquidity.

The overall goal of these solutions is to hasten the transition from cash outflow to inflow, promoting corporate expansion.

The Factors Driving Traditional Trade & Supply Chain Finance Solutions

Banks

• Control of collateral: Banks may use the shipping documentation that traditionally traded goods offer as collateral to recoup their losses.
• Payment control: Banks keep control over payments made in conventional trade, ensuring they are used to pay back related debt.
• AML/Sanction screening: Banks can check for AML and sanction issues because they have access to shipping papers.
• Operational cost: Automation in supply chain financing reduces costs.

Clients (Buyers/Suppliers)

• Transaction costs: Traditional trading may have more significant transaction costs than supply chain financing.
• Process complexity: Conventional trade processes may be convoluted and less adaptable.
• E2E process time: Supply chain financing frequently leads to quicker payment receipts.

Fintech

• Digital disruption: With an emphasis on supply chain finance, fintechs are leading the industry’s digital transformation.
• Problems with traditional trade: The reliance on paper documentation makes digitization difficult.
• Fee-based income: Banks and businesses can benefit from fee-based income prospects provided by fintech solutions.

The takeaway

Both traditional commerce and supply chain financing will be essential in assisting businesses as global trade continues to change. Although supply chain financing is currently on the increase, traditional trade may eventually become more competitive as a result of digital disruption. It is the industry’s responsibility to embrace digital solutions and ensure that traditional trade continues as a viable alternative to its contemporary equivalent. With trade flows expected to reach USD 27 trillion in 2028, traditional and supply chain finance have a lot of room to grow, adapt, and continue enabling international trade. Contact Triterras, which provides the finest trade finance solutions for firms all over the world.