Structured trade finance is a common way for commodity exporters to finance their operations, with banks being the primary lenders. There are two main formats: working capital guarantees and accounts receivable, both of which help mitigate financial risks and protect assets.
Structured trade finance is the primary means through which many of the world’s commodity exporters finance their operations. Global business is largely fueled by commodity trade. Some of the most valuable assets are oil and precious metals, but timber, textiles, and agricultural products such as coffee and cocoa are also major players. However, international trade is expensive, even when it can generate significant profits. Traders from all socioeconomic backgrounds often require financing early on, which typically comes in the form of complex collateral and contractual agreements entered into under the umbrella of structured trade finance.
Banks and banking institutions are the primary lenders in structured trade finance transactions. In some ways, these transactions are similar to loans, in that merchants usually receive money up front, but they are set up very differently. Instead of having a due date for redemption, banks set up ongoing payment plans, in which invested principal and foreign credit payments reinvest the money in the structured trade instruments as the trade completes and matures. .
Generally, there are two main formats of structured trade finance. The first format centers around a working capital guarantee, which is essentially an up-front cash payment for the appraised value of the products to be marketed. This type of plan is popular for merchants in developing countries or in countries that do not have stable credit. It can be difficult for this type of exporter to gain enough support to pay the fees so often involved with exporting at the front end: stocking the product, processing it, and arranging for shipment, to name a few. Costs associated with contracting and dealing with the importer are usually factored in as well.
The second type of structured trade finance focuses on accounts receivable, which takes advantage of the strength of foreign contracts. In these cases, you are not assessing the value of the actual goods, but rather the value of the import/export agreement itself. The leverage of the contractual instrument allows traders to maintain control over their assets and the corresponding pricing structure, while mitigating risks with foreign creditors. Most of the time, this type of plan is carried out by importers and exporters who are in a similar financial situation or where the exporter’s credit is perceived as more reliable.
Individuals and corporations engaged in international trade often enter into structured trade finance agreements with banks, even if they have adequate capital. Involving a bank and having a third party assess and structure the financial aspects of a business deal limits financial risk and is, in many ways, a securitization measure. Imports and exports often feel secure when backed by a structured plan. Financing complex transactions helps protect a merchant’s financial assets, which can help control market prices and, in turn, can help keep costs consistent for consumers.
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