For New Zealand businesses dealing in import, export and trade, it can be tricky to bridge the gap between expending money placing orders and receiving the payments locally form customers and clients.
This cash flow challenge is significant. And both Invoice Finance and Trade Finance can help. However, they offer different benefits and are utilised by small and medium sized enterprises (SMEs) in New Zealand very differently.
To find out more about Invoice Finance or Trade Finance, visit our product pages.
Invoice Finance vs Trade Finance: What is the difference at a glance?
Invoice Finance
Invoice Finance allows SMEs to turn unpaid domestic or export invoices into immediately accessible cash. It allows you to unlock your unpaid invoices and turn them into a facility, similar to a flexible line of credit, secured against your receivables. It can help:
- Cover wages and payroll
- Pay suppliers
- Scale your business
- Invest in new markets, products or assets
Trade Finance
Trade Finance funds the import or export transaction itself. It does this by extending payment to suppliers and thereby securing goods by mitigating the risk of trade and allowing your business to not have to wait for revenue to come in. It can help:
- Pay suppliers upfront
- Secure cheaper and longer payment terms
- Maintain stable stock levels
How do you choose the right tool as a Kiwi importer?
For New Zealand businesses, understanding when to use Invoice Finance and Trade Finance solutions, is important.
For importers, Invoice Finance can be the right financial tool when:
- You have sent invoices to your local or overseas buyers but need the cash now to pay suppliers, freight, or duty; or
- You are scaling your orders and your customers’ payment terms and need to bridge the gap in cash flow.
For importers, Trade Finance might be the right financial tool when:
- You need to pay overseas suppliers in advance for inventory
- You need to accept larger orders, extended payment terms with suppliers, or ship goods without reducing access to needed working capital
How does Invoice Finance compare to Trade Finance?
Invoice Finance can be thought of receivables-based funding. In other words, you receive working capital secured against the invoices you have already issued.
Trade Finance is more transaction-based funding. This means it is a solution for accessing working capital to help facilitate the trade itself.
The table below helps to outline the differences:
| Invoice Finance | Trade Finance | |
|---|---|---|
| How does it work? | Access working capital that is otherwise tied up in unpaid invoices | Receive funding for importing transactions ahead of revenue generation |
| When is it used? | After you have invoiced your customers or clients | During the transaction stage of your importing arrangement |
| How is it secured? | Against your unpaid invoices i.e., accounts receivable | Against trade documents, stock, or Letters of Credit etc. |
| What is the primary risk? | Your customers not paying their invoices | The risk of the trade not being fulfilled |
When should a New Zealand Importer use Invoice Finance?
If late-paying customers or too generous payment terms are affecting your cash flow management, Invoice Finance is likely the better answer.
Ask yourself these questions:
- Do you have good-quality, high-value collectable invoices?
- Do you offer generous payment terms to your customers?
- Do you want working capital scaled with sales and not secured by assets?
Then Invoice Finance is likely the right option for you.
When should a New Zealand Importer use Trade Finance?
If the initiating or fulfilling of trade is the biggest hurdle you are facing in your business, Trade Finance is likely the better facility for you.
Ask yourself these questions:
- Do you need to pay suppliers or manufacturers upfront?
- Do you need to extend stock levels ahead of seasonal increases in demand?
- Do you want to mitigate the risk of foreign exchange and trade?
Then Trade Finance is likely the right option for you.
Can Invoice Finance and Trade Finance work together?
Yes, they absolutely can. Many SME importers in New Zealand enjoy the benefits of both financial facilities to maximise cash flow efficiency.
How can Invoice Finance and Trade Finance work together?
- Trade Finance is used to fund the purchase and shipment of goods.
- Invoice Finance is used to then unlock the subsequent sales invoices into advanced cash.
Utilising both forms of finance offer numerous benefits:
- You can compete for larger contracts
- You can meet tighter supplier requirements
- You can maintain a stable cash position throughout the trade lifecycle
Which is better for my company: Invoice Finance or Trade Finance?
Because there are many different factors, we strongly recommend that you consult with a lending specialist here at ScotPac. We can help you determine which financial solution, or combination of solutions, best suits your needs and business objectives.
With over 35 years of trade experience and as the largest non-banking lender across New Zealand and Australia, we are best positioned to help fuel your business’s success.
To get started or find out more about Invoice Finance and Trade Finance, contact us today.
