What is Structured Trade Finance?
Structured Trade Finance
Structured trade finance products are used primarily in the commodity sector by traders, producers and processors. Banking corporations tailor these financing arrangements based on the needs of the client. Structured trade products are mainly warehouse financing, working capital financing and pre-export financing. Also, some institutions extend reserve based lending and finance the conversion of raw materials into products amongst other bespoke finance products. Structured trade finance products are extended across the supply chain to facilitate trading activities.
Trade Finance has been strongly complemented by recent technological advancements. Letters of credit, bank assurances, trade credit insurance, factoring and forfaiting are some of the structured trade finance products commonly used by trading companies and changed by these advances. The progress in information and communication domains have helped banking corporations to track physical risks and events in the supply chain between exporter and importer.
Banking corporations have built advanced models based on existing information and this has helped lenders to manage payment related risks. The transactions carried out through structured trade finance products are not reflected in the company’s balance sheets and the presence of financing options has helped importers to have flexible credit terms with exporters. Structured trade finance products and recent technological advancements are the primary reasons for increasing volumes of international trade in recent years.
Post the European banking crisis, global banks pulled back from financing trade in Asia and other emerging markets, however the local and national banks in the respective countries have stepped up to resolve the issue. Local banks and lending institutions are increasing their share of trade finance products in the market. Also, the use of currency other than the US dollar is constantly gaining traction in the trade finance markets worldwide.
About one third of the global trade is supported by trade finance products and LCs alone support one sixth of the global trade related activities. Emerging economies are the biggest beneficiaries of trade finance products. Global banking corporations alone support one third of trading activities in the world through structured trade products. Particularly in Asia, banks play a vital role in financing trading activities. China and Hong Kong are the two major economies in Asia that use trade finance products to effectively finance trading activities.
Trade finance products are expected to perform strongly in the upcoming years. When trading activities significantly declined during 2009 financial crisis, trade finance products were considered relatively safe and liquid. In 2012, Trade finance products supported over $8 trillion worth trading activities internationally and LCs alone supported trading activities worth $3 trillion. One third of all trading transactions in the world used more than two trade finance products and two third of all trading activities used some form of trade credits and bank credits.
Read more on structured terms of payment here.