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How does a trade finance transaction progress?

It is important to understand the complexities in a trade or structured finance lend when compared to other structures of facility. There are specific elements required when compared to simple cash flow lending or receivables type finance. This is because the trade terms and cycles along with the underlying products have to be understood. It is also typical that there will be cross-jurisdictional trade. In actual fact, the credit process amongst many types of facilities follows a similar process to the one outlined below.

Due diligence process explained

What does a due diligence (DD) process look like in a trade finance transaction?

When presenting a company to a funder, it is important to understand and outline the trade along with the company history. This will include the cash flows, management, structure and direction. This is so that it can be presented to a funder in the way that they are comfortable with.

After presenting the information to the funder, an initial call or meeting may then be set up with a financier, so that they can understand the financing flows and product cycles in more detail.

The Trade Finance Process:

  1. The potential borrowing company will send their management accounts and audited financials; as a best case this would be the previous 5 years
  2. In the event that the initial documents and financials outlined above are satisfactory, then a financier will outline that they can move forward on this basis. At this stage more KYC documents will be filled in along with credit application forms
  3. A call or meeting may then be set up with the prospect to discuss trade flows
  4. The transaction will then be taken to the operations or credit team to be discussed
  5. On the basis that the borrower is happy to move forward, then the more extensive due diligence process is carried out once documents have been received from the prospect
  6. Following due diligence, the business case may need to be circulated around the specific transaction team that deals with the type of facility being requested
  7. After internal approval, the borrower is sent a draft of the term sheet
  8. Following agreement of the outline facility by the borrower and a term sheet being accepted; a deal is presented to the Credit Committee
  9. Questions may be asked by the Credit Committee in order to understand the processes in a company. When approved, legal agreements, such as security agreements and a facility are drawn up
  10. All of the personnel who will have a part in the running of the facility will have an operational meeting so that each party will understand the moving parts involved and what their responsibility entails. The management of the client and smooth running of the account is key
  11. When all of the above is completed and the agreements are signed, funds are then released
  12. Following drawdown of facilities, the company will have administrators who will monitor the facility and manage it; so that they can make sure all funds flow freely. They also make sure that all facilities are reviewed, outstanding balances are cleared, there is management of counterparty risk, facility reconciliation is carried out and there is management of when repayments may happen.
  13. On borrowing base or more structured type facilities; there may be the need or execution of further security documents, such as pledges and collateral management arrangements.

It is important to understand the steps that are carried out by different lenders; so that each party is able to effectively manage expectations.

Video: What is trade finance?

To find out more about trade finance, read our in depth guide here.