When lenders purchase stock from a seller on behalf of the buyer, stock finance becomes available as an instrument that releases working capital from stock such as finished goods or raw materials. This mechanism is different from invoice finance and tends to be used as a 30-90 day revolving facility to enable access to cash when a business needs it.
There are ways of stock financing for importers and exporters. The system or facility is different from the stock market business which is primarily a trading market, where buyers and sellers trade on specific stocks. Trading happens in an exchange center such as in the New York Stock Exchange, where brokers deal with both buyers and sellers.
Stock financing is a part of a global business where buyers and sellers come to a particular place to purchase stocks of manufactured goods. Stock finance provides the working capital to enable the purchase of an inventory of products that would be exported to the buyer. The ways of stock financing include business transactions in cross-border and domestic trade using available financing tools such as import bills for collection, letters of credit, shipping guarantees, pre-shipment export, and invoice factoring and discounting.
Trade Finance Global notes that stock finance differs from straight funding of working capital.
In stock finance, the borrower uses the funds of the lender to purchase the product and later sell. The stock is first kept inside a warehouse before being sold. Since it takes time for negotiations and confirmed purchase orders to arrive, buffer stock is also placed inside the goods storage facility to be sold to customers later where trade finance is not applicable. The option includes selling to individual consumers online.
Stock finance includes the following components: Lending, Issuing Letters of Credit, Factoring,
Export Credit, and Insurance. The ways of stock financing are beneficial for both exporters and importers. Exporters can facilitate the sale of their finished products due to the availability of the credit facility. Importers, as a result of the facilitation by stock finance, can get their purchased products from the exporters in a shorter time.
Products that may be sold include Electronics products, watches, furniture, lighting, commodities, hardware, wood, and cars as examples. Stock finance works when a buyer decides to buy goods from an exporter or supplier. The buyer opens a credit line with a lender, and the lender pays the supplier as the latter sends the products to the buyer.
Stock financing is less risky than money placed into stock market trading. The warehouse facility where the goods are stocked can hibernate for a while waiting for merchants who would purchase the products providing less time pressure on the seller. When an investor goes into the purchase of manufactured goods intended for sale to a buyer or market, he may avail of a limited period revolving facility where cash can be accessed whenever needed within 30 to 90 days.
In contrast, when an individual wants to invest in stock market trading, the investor may need to add more cash required by the trading market by engaging a financing company for a loan in the investment project. If the investor has a significant amount of investment portfolio, the investor will need an established financial institution to provide him with a financial plan. If the risks are “good,” the financial institution may bankroll a part of the investment.