Letters of Credit and Trade Finance

Trade Finance vs Supply Chain Finance

Trade finance and supply chain finance are often used as if they mean the same thing. They do not. Both help goods move and both release working capital, but they are built around different risks, different parties and different sources of credit. This guide compares them side by side so you can see which fits your trade cycle, or whether you need both.

Side-by-side definition

Trade finance is financing and risk mitigation tied to a specific transaction or shipment. It relies on documents, control of goods and bank undertakings such as letters of credit. It can support either the buyer or the seller. See what is trade finance.

Supply chain finance (SCF), in its common form also called reverse factoring or payables finance, is a buyer-led programme. A large buyer approves its suppliers' invoices, and a funder pays those suppliers early at a discount based on the buyer's credit. The buyer then pays the funder at the original due date. See how supply chain finance works.

Feature Trade finance Supply chain finance
Who starts it Buyer, seller or trader, deal by deal A large buyer, as a programme for many suppliers
Whose credit is relied on Issuing bank, the goods, or the borrower and its controls The buyer's credit
Main purpose Secure payment and fund a specific trade Pay suppliers early while the buyer keeps its terms
Typical trigger Compliant documents, shipment or contract Buyer approval of an invoice
Security Goods, title documents, assigned proceeds, bank undertakings Approved invoice and buyer payment obligation
Payment terms Sight, deferred or open account with cover Open account
Best for New or riskier counterparties, cross-border trades, commodities Established buyer and supplier relationships
Documentation Contracts, LCs, bills of lading, inspection and insurance Platform onboarding and invoice data
Who pays the cost Varies: applicant, beneficiary or both Usually the supplier, through the early payment discount
Accounting attention Instrument specific Buyers may need to disclose programmes in their reporting

Who gets paid and who takes risk

In trade finance, the protected party depends on the instrument. Under a letter of credit, the seller is protected because the issuing bank promises to pay against documents, and the buyer is protected because payment only happens if shipping documents comply. With an import trade loan, the importer gets cash to pay the supplier and the lender takes risk on the importer and its resale. With pre-export finance, the producer is funded and the lender relies on the offtaker.

In supply chain finance, the supplier gets paid early, the funder takes risk on the buyer, and the buyer keeps or extends its payment terms. The supplier does not take buyer risk once its invoice is paid early, but it does depend on the buyer approving invoices.

Instruments typically used in each

Trade finance instruments include:

Supply chain finance tools include:

  • Reverse factoring or payables finance programmes.
  • Dynamic discounting, where the buyer uses its own cash.
  • Distributor finance, the sell-side mirror. See distributor finance.

Full mechanics are in trade finance instruments explained.

When trade finance is the better fit

  • New counterparties. The parties do not yet trust each other, so a bank undertaking is needed.
  • Cross-border risk. Country, bank or transfer risk needs to be managed, often with confirmation.
  • The buyer is not investment grade. SCF depends on a strong buyer; trade finance can rely on goods and controls instead.
  • Pre-shipment cash is needed. SCF pays after an invoice is approved, which is too late for a producer that needs funds to make the goods.
  • Commodities. Large, price-sensitive cargoes need control of title. See commodity trade finance explained.
  • One-off or irregular deals. Programmes are built for steady, repeating supplier flows.

When supply chain finance is the better fit

  • A strong buyer with many suppliers. The programme spreads the buyer's credit across its supply base.
  • Stable, repeat relationships. Suppliers ship on open account and invoices are approved routinely.
  • Buyer wants longer terms. SCF lets the buyer extend payment terms while suppliers still get paid early.
  • Suppliers want low-cost liquidity. Pricing often reflects the buyer's credit rather than the supplier's.
  • Low documentary burden. No LC presentation, so fewer discrepancy issues.

Can you use both in one supply chain?

Yes, and many companies do. A common pattern is a manufacturer that uses letters of credit or an import loan to buy raw materials from overseas producers it does not know well, while running an SCF programme for long-standing domestic component suppliers. A trader might use structured trade finance on the purchase side and sell to a large buyer that pays through its SCF programme. Each tool covers a different part of the cycle.

The practical question is where in your cycle the cash gap and the risk sit. Map each supplier and buyer relationship, then choose the tool for each. Many such trades are also self-liquidating, which helps on the trade finance side. See also types of trade finance.

Financely is a fee-based arranger and advisor, not a lender or platform. We help clients compare structures, prepare the file and approach suitable banks and funders. Fees pay for the work, not for an outcome. See trade finance.

Frequently asked questions

What is the main difference between trade finance and supply chain finance?

Trade finance funds or secures specific transactions using documents and bank undertakings. Supply chain finance is a buyer-led programme that pays suppliers early based on the buyer's credit.

Is supply chain finance a type of trade finance?

It is often grouped under trade finance in a broad sense, but it works differently and relies on buyer credit rather than goods or documents.

Which is cheaper?

It depends. SCF pricing often reflects a strong buyer's credit. Trade finance cost depends on the instrument, the banks and the risks.

Can a supplier request supply chain finance?

A supplier can ask, but the buyer normally sets up and controls the programme.

Choosing between trade finance and SCF?

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