By purchasing stock from a seller on the buyer’s behalf, a stock finance mechanism frees up working capital that would otherwise be held in inventory. Stock financing, in contrast to invoice financing, is often used as a revolving facility to provide a company with access to capital on an as-needed basis and has a shorter term commitment of 30 to 90 days.
Stock financing is distinct from conventional working capital funding in several key respects, including the ability to move, buy, sell, and/or deliver goods and services on a domestic and worldwide scale.
Stock finance, a form of loan used by many international and domestic trade organisations, is becoming increasingly common. It’s important to note that trade financing is distinct from other forms of supply chain or invoice financing
What does Stock Finance Include?
Stock finance encompasses a wide variety of financial services designed to ease the process of doing business on a global scale. Given the wide variety of resources and the wide range of industries and products available, a wide variety of methods are employed. Among these are import bills for collection, letters of credit (LCs), pre-shipment exports, shipping assurances, and invoice discounting.
Stock Finance includes:
2. Issuing LCs
4. Export Credit
Why use a stock financing facility?
Many businesses are unable to benefit from the traditional buyer-seller trade credit arrangement. They will have to acquire and maintain stock of goods. Several of the following are contributing reasons to this situation:
1. Protect reputation by not being under-stocked
2. Hedge out risk
3. Having stock to provide for seasonal fluctuations
4. Demand adjustment in certain products
5. Requirements for buyers and suppliers
Stock finance is crucial in the trading industry because of the frequent occurrence of trades that do not include a direct match between the purchase order and supplier, and where things flow directly to the end buyer.
A further rationale is that it protects against trade and cash flow risk. The importer runs the risk of the exporter simply pocketing the money and not sending the products. However, if the exporter extends a favour to the importer by providing some sort of service, the importer can choose not to pay or can delay payment indefinitely. That problem can easily fixed by having the importer go to a bank in the exporter’s place of operation and open an LC in the exporter’s name. The LC allows the bank to guarantee payment to the exporter. For instance, the importer’s bank may issue a letter of credit (LC) to the exporter’s bank, guaranteeing payment upon presentation of specified documentation. The exporter’s bank may extend a line of credit in light of the agreement to ship goods abroad.
An LC is the industry standard for financing stock purchases.
Physical dangers and occurrences along the supply chain between two parties must be accurately and securely tracked in order to ensure the safety of any stock finance transaction. To keep the importer’s regular payment credit conditions and avoid affecting the importer’s balance sheet, an advance payment might be made to the exporter. This is made feasible by various strategies for reducing risk, the introduction of specialised products, and technical progress.