What is trade and supply chain finance?
Trade and supply chain finance covers short-term funding tied to specific transactions: a sale you have made, an order you have received or a purchase you need to pay for. Instead of borrowing against your whole balance sheet, the lender looks at the invoice or order and, importantly, at the buyer behind it.
For an MSME supplier to a large company, this can be the difference between waiting 90 days for payment and getting most of it within days.
The main instruments
| Instrument | What it does | Who it typically helps |
|---|---|---|
| Invoice discounting | Advances against invoices already raised | Suppliers with long payment terms |
| Bill discounting | Advances against bills of exchange accepted by the buyer | Traders and manufacturers |
| PO financing | Funds production or purchase against a confirmed order | Businesses with orders larger than their working capital |
| Letter of credit (LC) | Bank's undertaking to pay your supplier on documents | Importers and buyers on credit |
| Bank guarantee (BG) | Bank's backup promise if you fail an obligation | Contractors and tender bidders |
LCs and BGs are non-fund limits: no money leaves the bank unless the instrument is used or invoked. Banks still charge commission and usually ask for margin.
How limits and pricing are set
Lenders weigh your buyer's credit standing heavily, sometimes more than your own. Discounting an invoice on a well-rated company can be priced quite differently from one raised on a small trader.
Other factors include the tenor of the invoice, whether the buyer has acknowledged it, and whether the facility is with or without recourse. For MSMEs selling to larger companies, TReDS platforms let several financiers bid on accepted invoices.
Lenders also check that each invoice is genuine, often by matching it with GST data, delivery proof and the buyer's confirmation. Businesses whose invoices, returns and bank credits line up neatly tend to get limits set up faster and drawdowns processed with fewer queries.
Things to compare before you choose
- Effective annual cost. A small charge for 30 days can add up to a meaningful rate over a year.
- Recourse terms, and what happens if the buyer disputes or delays.
- Margin on LC and BG limits, since cash or FDs kept as margin are money you cannot use elsewhere.
- Turnaround time for issuing an LC or BG when a tender deadline is close.
Our team compares trade finance offers from 40+ banks and NBFCs and stays involved for drawdowns, amendments and renewals.
