When it comes to the business world, there are practices that you need to do that sometimes lead to liquidity problems. Clients often expect short lead times and some need to see the products first before they purchase. This can result in having huge inventories, which may incur financing costs and tie up your cash flow. Stock financing can be a solution to your cash problem.
What Is Stock Financing
With stock financing, you can use your inventory for the release of working capital. This may be in the form of finished products or raw materials. Lenders would be buying the stock from a seller on behalf of a buyer. This is usually done on a 30 to a 90-day window and acts as a revolving fund to give a business the needed cash for other purposes.
This is totally different from straight funding of working capital because it involves the movement, purchase, and sales of goods that are a part of a company’s inventory.
Stock finance is a kind of lending facility used by a lot of trading companies. It is a type of financing where the borrower uses a lender’s funds in order to purchase products to sell, which is often stocks that are sitting in a warehouse as part of the inventory. This differs from trade finance because there are no confirmed purchase orders.
Stock finance includes a lot of financial services designed to make domestic trade easier. This may involve lending, factoring, export credit, insurance and issuing of Letter of Credit. There are also a lot of products that could be purchased using a stock finance facility like watches, furniture, lights, hardware, electronics, wood, and automobiles.
There are also a lot of types of stock finance which include: Import and Export Finance, Letter of Credit, Discounting, Factoring, Trade Credit Insurance, Documentary Collection etc.
Benefits Of Stock Finance
A company can greatly benefit from stock finance as working capital can be released that would otherwise be tied up with inventory. The funds can be used to grow and expand the business or come up with new business opportunities. Since it is a revolving facility, you can get access to funds when you need it. This is beneficial for companies in retail, wholesale and foreign trade, especially when it involves seasonal stock inventories. Added funds can be released by asset-based lending facilities against existing assets like property, plant, and machinery.
The Value Of Stock Financing Facility
A lot of businesses are not able to do the functions of a trade finance facility where there are a buyer and seller. Normally they would need to buy and store stock on inventory. This is needed in order to show clients that they are not lacking in inventory. Being under-stocked can have an effect on the company’s reputation. They also need a stock to avoid hedge out risks and provide for seasonal ups and downs. Most buyers would require their suppliers to have inventory on hand and would expect continuous supply, especially when there is a rise in demand for a product.
Stock finance facilities can help in trades that don’t have a match when it comes to the purchase order and the supplier. Coming up with a good trade partner is one of the benefits of a stock finance facility.
The risk is also covered through a letter of credit. There is a possibility that exporters can get the payment and do not deliver the goods. Things can be reversed with the exporter sending payment to the importer who may refuse to make payment or cause delays. Using a letter of credit solves this dilemma, with the bank as the stock finance facility, guarantees payment to the exporter. The importer’s bank may provide a letter of credit to the exporter’s bank agreeing to pay upon submission of certain requirements like a bill of lading.
Security is the number one priority in any stock finance transaction. Choosing the right stock finance facility can help in the tracking and verifying of risks between both parties. There are a lot of tools available that offer risk mitigation and advances in technology that may reduce the risk when an advanced payment is sent to a party involved in a stock finance transaction