Trade finance, invoice factoring, and receivables discounting

Trade finance is the umbrella term for financing that bridges the gap between when a business delivers goods or services and when it actually gets paid for them. Invoice factoring and receivables discounting are two of its most common forms, and both solve the same underlying problem: a company has money coming, just not yet.

How it works

A business issues an invoice to a customer with payment terms, 30, 60, or 90 days being typical. Rather than wait out the term, the business can sell that invoice, or a batch of them, to a financier at a discount. In factoring, the financier (the "factor") buys the invoice outright, takes over collection from the customer, and pays the business an advance, often 80-90% of face value, upfront, with the remainder (minus a fee) paid once the customer settles. In receivables discounting (sometimes called invoice discounting), the business keeps managing collection itself and simply borrows against the invoice as collateral, a distinction that matters because the customer usually never learns financing is involved at all.

The discount, or fee, is priced off two things: how creditworthy the paying customer is (not the business selling the invoice) and how long the money's tied up. A 60-day invoice from a large, investment-grade buyer prices very differently than a 90-day invoice from a small, unrated one, because the factor's real credit exposure is to whoever ultimately has to pay.

Trade finance covers a wider set of tools beyond invoices too: letters of credit that guarantee payment across a cross-border transaction, purchase order financing that funds a business before it even ships the goods, and supply chain finance where a large buyer extends better terms to its suppliers through a bank intermediary.

Why it matters

For small and mid-sized businesses, trade finance is often the difference between growing into a new order and turning it down. A company with a $2 million purchase order and 90-day customer payment terms can't wait three months to buy raw materials and pay staff; factoring turns that receivable into cash on day one.

For lenders, receivables are an attractive private credit asset class precisely because the duration is short (weeks to months, not years) and the credit risk is diversified across many underlying customer obligors rather than concentrated in a single borrower. A portfolio of receivables from dozens of different paying customers behaves very differently than a single long-duration loan to one borrower.

Where this shows up in Rekord

Trade receivables financing is one of the RWA deal types institutional credit portfolios use for short-duration, diversified exposure. For how it's underwritten and structured as a deal type, see Trade receivables and invoice financing: short-duration, corporate-obligor credit.