Anyone looking for the term “finetrading” in an English dictionary will search in vain. Finetrading is an excellent form of financing of working capital, primarily for small and medium-sized enterprises (SMEs). At first glance, it is similar to factoring, but shows significant differences, especially in terms of costs. Bank loans have the disadvantage that the credit line is eventually exhausted. Finetrading takes effect on a case-by-case basis and thus allows individual management of liquidity.
What is finetrading?
Finetrading is a financial service detached from banks. The Finetrader is interposed between the buyer of a commodity, its principal, and the seller. He acts first as a buyer, then as a seller to his client. Finetrading is not a purchase of receivables from the perspective of the supplier, but a form of pre-financing for the buyer. The basis for finetrading is a framework agreement between buyer and finetrader.
Finetrading = reverse factoring
Finetrading is still a relatively new form of pre-financing for the purchase of goods and is also referred to as reverse factoring. How finetrading works and how it differs from classic factoring is explained below.
The process of finetrading
After buyers and sellers have arranged a transaction contractually, the buyer turns to a finetrader. As a rule, the contract also provides for a discount on immediate payment. The finetrader makes a credit check of the buyer, since he actually grants a loan. The prerequisite for being able to profit from finetrading is first-class creditworthiness. This is necessary for the commercial credit insurance to be taken out.
As a result of the purchase contract, the finetrader enters into the contract after the acceptance of the customer and acts as the new debtor towards the seller.
In the next step, he pays the goods immediately after delivery of the seller to the buyer with deduction of the discount, becoming the owner of the goods. He then sells the goods to the original buyer, but with a payment term that can be up to 120 days.
Who can use finetrading?
Against the background of the credit check, finetrading is only suitable for financially strong companies. Buyers can thus finance costs up to 15 million USD. The lower limit is usually 250,000 USD, in exceptional cases, 20,000 USD.
What are the costs of finetrading?
In contrast to factoring, the buyer first receives the costs for the framework agreement, which includes the credit check. This may involve expenses for implementation in the IT. In addition, there are still costs for the respective financing.
Advantages of Finetrading
- The buyer benefits despite a longer payment term from the discount.
- Control individually from business transaction to business transaction.
- Credit-dependent costs
- Finetrading offers a financing quota of up to 100 percent.
- Contracts are indefinite with any possibility of termination.
- Sellers get their money immediately and do not have to wait until the payment deadline.
- For the seller, the default risk for the purchase price is eliminated.
Companies that meet the requirements for finetrading are opening up a new form of liquidity-saving financing of current assets with this type of financing.