Trade finance vs. invoice finance: which fits your business

Trade finance and invoice finance are often spoken about in the same breath, and both do free up working capital. But they solve different problems, at different points in your cash-conversion cycle. Choosing the right one — or both — starts with understanding what each is for.

Trade finance: funding and de-risking the transaction

Trade finance supports the transaction itself, typically before goods change hands. Instruments such as letters of credit and guarantees give a supplier confidence they will be paid and give a buyer confidence that payment is released only against the right documents. It suits importers and exporters managing cross-border counterparty and documentary risk, and businesses fulfilling large orders that must be paid for before they generate revenue.

Invoice finance: advancing cash you're already owed

Invoice (or receivables) finance works at the other end of the cycle. Once you have delivered and issued an invoice, a financier advances a large portion of its value immediately — rather than waiting 30, 60 or 90 days for the customer to pay. It suits businesses that sell on credit terms to creditworthy customers and need to bridge the gap between delivery and payment.

The key differences at a glance

Timing. Trade finance generally sits before or around delivery; invoice finance sits after delivery, against an issued invoice.

What it's secured on. Trade finance is structured around the goods and the documentary flow; invoice finance is secured on your receivables — which is why it can suit businesses without spare property to pledge.

Who it suits. Trade finance fits importers, exporters and order-driven businesses; invoice finance fits businesses with a steady book of credit sales to reliable debtors.

A simple way to choose

Ask where your cash gets stuck. If the squeeze is paying suppliers or fulfilling an order before you're paid, trade finance is usually the tool. If the squeeze is waiting for customers to settle invoices you've already raised, invoice finance fits. Many growing businesses ultimately use both — trade finance to fulfil and invoice finance to bridge the receivable that results.

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