Commodity Finance: What are the Benefits and does it work?

The demand for customer commodities is always increasing, but the production can sometimes stay stagnant. Commodity finance is a form of support for export trade companies to help ensure that output will go on. Industries linked to a global commodity broker such as IG talk about the rise and importance of commodity finance.

Loans are provided to wholesalers and manufacturers for export companies for them to repay later on. These export trade corporations usually focus on mining, energy and soft products like agriculture, so that there is a stability in supply, demand and price control. Metals, mining, and power are also within the scope of commodity finance. Resources have to be managed efficiently to meet the increasing demands of consumers. We all need energy supply to be fixed and stable.

Here are some of the benefits and functions of commodity finance:

  1. It Enables Companies to Source More Materials

Commodity finance allows companies to spend the same but produce more, increasing the transaction level. A loan gives corporations offering products the chance to produce more goods, and they can source even more materials, whether raw, semi-processed or fully processed. You can think of it like taking credit from the bank, so your purchasing power increases.

  1. It Bridges The Gap Between Lack of Prepayment And The Need For Funds

Commodity finance is a unique form of financing that allows for continuous production even without a large prepayment. The nature of commodity trading entails the lack of trust between the seller or exporter and the buyer or importer. This situation stems from the cross-border nature of the transaction in this industry.

Import-export transactions are generally riskier than inter-border trades, as there are many risk factors involved such as delay in shipments, loss of products, hijacking, calamities and the like. These conditions drive pre-payment of commodities ordered limited only to a small sum, hence the need for commodity finance to come into place.

  1. Loans Are On A Short-Term Basis

A good thing about commodity finance is that this loan situation is usually short-term. Long-term payments are not very common. Do remember that the primary purpose of this type of transaction is to finance the production of goods, so the company has better export options. While most companies require their customers to prepay their purchased products before the export takes place, this prepaid price may not be enough to meet the production costs.

The short-term period of the loans also helps the company “breathe” faster, as, in a short period, they will no longer have to think about the paying off of the debt and can start reaping their profits, small or big. One of the services provided concerning loans is revolver credits that commodity finance can help ensure.

This credit will significantly improve your cash flow situation, as you will have a higher amount that you can use as revolver credit especially in cases of delays in production, shipment, receivables, and emergencies.

  1. One-Stop-Shop That Offers Solutions

Another advantage of commodity finance is that companies that provide this type of lending service have experts and specialists that can also help you study and learn about emerging markets that are perfect for the products that you have, whether in the mining industry, in the energy sector, or even in primary agriculture.

This study will give you an idea as to what markets you can penetrate so that the loan that you take will also be for proper use. In so doing, you may find your product’s niche.

  1. Offers Specialized and Specific Solutions

Every company that enters into commodity finance trading is different from each other and has different needs. Commodity finance agreement also focuses on the type of commodity that the company offers. For example, the mining industry will always have different lending and product requirement as a gas company. You cannot treat them as the same.

Commodity finance focuses on specific export (or import) flow transactions. The approach is very personal and will never be the same for a different company. It gives an individualized risk approach.

Conclusion

If you think about it from the higher perspective, all individuals seek to be benefited by commodity financing. As the companies will have more power to buy raw materials, to process them and to export them, more goods will be readily available in the market; hence the stabilization of the supply and demand relationship will also take place.

This stability can, in turn, lower the prices of these goods – which will help you, the consumers, too. In general, commodity financing helps ensure that trade will go on and has no stops.

What is structured commodity finance?

Structured Commodity Finance or SCF is a financing type used for hard and soft commodity finance, where most normal debt funding types won’t work. SCF looks at wider trading cycles, acknowledges the complexity of trading commodities on thin margins, and needs to take into account the volatile pricing changes of commodities. Commodity trade finance often concerns the short term financing needs between producers, processors, smelters or crushing facilities, other traders and end-users. Read our Structured Commodity Finance guide here.

Financing for commodities and crops is difficult. See our commodity finance guide here.

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