What is structured trade finance?
Structured trade finance is a type of debt finance, which is used as an alternative to conventional lending.
It is a specialist and more complex type of finance, which is used primarily in the commodity sector by traders, producers, and processors.
Structured trade finance products are used across the supply chain, and work together to have a coherent structure.
There are many types of structured trade finance, including:
- Uncommitted trade facilities
- Pre-export finance
- Receivables finance
- Inventory finance
- Tolling financing; and
- Account receivables finance
Take wheat, an agricultural commodity, as an example. Multiple sources of finance could be used as a bale of wheat makes its way through the supply chain – from production and processing to storage and export.
Pre-export finance can be used for growing the stock of wheat; inventory finance can be used while the wheat is stored in a warehouse awaiting shipment; and receivables finance can be used for when the goods are delivered.
These financing structures will then sit together as structured trade finance.
How does structured trade finance differ from conventional lending?
Conventional loans are typically offered by banks, credit unions, and other financial institutions.
In conventional lending, lenders provide approved businesses with lump-sum funding, and the businesses repay the loans (plus interest and any applicable fees) over an agreed-upon term.
In contrast, in structured trade finance several loans are issued across multiple stages of the supply chain, and banks can tailor these financing arrangements based on the needs of the client.
The ultimate aim of structured trade finance is for the capital issued to mirror the trade cycle of a certain product, so that the loan is repaid via the movement and sale of the exported goods.
Why should SMEs use structured trade finance?
Structured trade finance is usually used for cross-border transactions in emerging markets. It tends to be used in high-value commodity transactions between bilateral trading partners.
Structured trade finance is used by both banks and non-banks. After the European banking crisis in 2008, global banks pulled back from financing in Asia and other emerging markets, so local and national banks stepped up to take their place.
Lenders tend to use structured trade finance as a means of risk mitigation, as each loan can be customised to a particular stage of the supply chain.
Structured trade finance assists lenders when protecting against supply shocks, demand changes, and price volatility.
Historically, commodity prices have tended to be relatively stable and predictable, which means that loans can be adapted quickly if conditions change. Over the last two years, however, the commodities markets have seen unprecedented volatility, so this association may be weakening among financiers.
For commodity producers, lenders can assist in accessing new markets and customers. This is mutually beneficial for both parties: the producer increases revenue by selling to new markets, while the lender collects interest on the new facilities provided.
Moreover, structured trade finance poses a lower risk for lenders (vs conventional lending), as the trade cycle is designed to be self-liquidating.
In other words, money borrowed to finance part of the supply chain is paid back by the production, processing, storing, transfer, or sale of the product.
Structured trade finance is attractive for small businesses, as the strength of the borrower is not looked at as closely compared with a conventional loan.
The structure provides an enhanced security mechanism, whereby each individual part of the supply chain is supported by a range of funding.
As mentioned above, this means that lenders can reduce their exposure to a single country or to commodities prices and risks.
Finally, for borrowers, due to the flexible nature of structured finance, funding can easily be scaled up when necessary, and payment times can be lengthened.
Agreements are key in relationships, and this is particularly true for structured trade finance.
Structured trade finance must be governed by clear contracts and underlying covenants.
You can read more about these instruments at Trade Finance Global (TFG), but beyond the paperwork, the true security of a structured trade finance transaction comes from the goods themselves, which finance themselves during the course of the trade cycle.
How can TFG help?
At Trade Finance Global (TFG), our advisers are experts in all things international trade, and we can help you find the perfect partner bank or financial institution to suit your financing needs.
TFG can advise you on what financing works best for your business, so that you can feel safe and assured during a trade transaction.
By working TFG, we can help you with all the documentation and procedural requirements, bringing added trust and security to your trade.
Get in touch with our team here.
Get in touch with our trade team