Trade finance landscape
Investors, lenders and corporates are bombarded with propositions involving trade finance and trade receivables, especially from the new breed of alternative trade finance providers.
This 1 minute guide to the trade finance landscape sets out the different business models and what they aim to achieve, splitting the market into three main approaches.
Receivables and payables: what's the difference?
Receivables and payables in trade finance refer to invoices arising between buyers and suppliers.
From the buyer’s perspective, an invoice is a payable
From the supplier’s perspective, an invoice is a receivable
One person’s payable is another person’s receivable. It is the same trade, just seen from different ends. Solution providers tend to focus on either receivables or payables, leading to three main business models:
Arrange financing from the buyer-side, then you have a payables financing (this is supply chain finance)
Arrange financing from the supplier-side: then you have a receivables financing, and there are two kinds:
repackaging a large portfolio of receivables for a single large supplier (securitisations), or
working trade-by-trade, shipment-by-shipment with individual suppliers and individual buyers (export finance, dual-factoring, letter of credit, export loan).
Payables financing: examples
A payable financing is commonly called “supply chain finance”.
In this situation, there is usually one buyer, and all his suppliers are then financed via some form of early payment mechanism. For these trades, the financier is accepting a risk concentration on the buyer – because all of the receivables will be owed by that one single buyer.
Historically these programs are expensive and complicated to set up with significant limitations around:
Invoice approvals and payment timing (not immediate)
Supplier eligibility (driven by the compliance appetite of lenders)
Buyer risk appetite (buyers can be reluctant to approve early payment)
IT costs (integration with buyer accounting / ERP systems).
But new platforms (such as www.prima.trade) are bringing supply chain finance to the mid-market by reducing the work that the funders have to do and getting all suppliers to be eligible for financing:
IT-lite - where integration is limited or even zero
Automated 3-way match at shipment
Automated invoice approvals and payments at shipment
Supplier eligibility restrictions removed
Early payments can be for less than the full invoice (to manage risk)
This next generation of platform is already proven and promises to open up the market for supply chain finance and payables financing.
Receivables financing: examples
This is not the same as supply chain finance. As already mentioned above, there are generally two kinds of trade receivable financing:
A single supplier financing receivables due from his multiple buyers – which is usually a form of factoring or documentary credit (letter of credit)
Portfolios being created from multiple suppliers working with multiple buyers – which can also be financed by securitisations
These are well-established products with a strong history - which are typically sold to the supplier-side rather than the buyer-side.
One easy way to understand whether a financing transaction is a receivables transaction or a payables transaction is to look at where the transaction starts:
if the buyer is initiating, then it is likely a payables financing;
if the supplier is initiating (whether large or small) it is likely a receivables financing.
Portfolio trades are commonly financed by securitisation. A large supplier has many buyers. For example, the supplier could be a multi-national with buyers (customers) all around the world. For the supplier, raising finance against its receivables (the invoices it issues to its customers) can be cheaper than borrowing in its own name. This is a repackaging of the trade receivables that are owed to the single supplier into some kind of loan or security.
Blockchain
Many of the above payables and receivables transactions can be supported by blockchain - although the use case is not always that clear. By and large, there are three main risks in these transactions:
credit risk
operational risk
fraud risk
Blockchain is potentially a mitigation for fraud risk if integrated fundamentally into the way that supply chains work - whether receivables or payables. At this stage, blockchain solutions have largely sat on top of existing processes and so arguably add little value.
Find out more
This is a complex and large topic. There are more materials on our website (www.prima.trade) and many good publications and resources on the internet - for example:
Securitisation:
Factoring:
Plaforms (payables):
Contact us to discuss any aspect of trade finance, supply chain finance, trade receivables, securitisation or trade payables. We have decades of expertise and we are always happy to discuss situations arising: info@prima.trade.