Structured trade finance is the primary means through which many of the world’s commodities exporters fund their operations. Global business is fed largely by commodities trade. Some of the most valuable assets are oil and precious metals, but lumber, textiles and agricultural products such as coffee and cocoa are important players as well. International trade is expensive, however, even when it stands to bring in significant profit. Traders from all socioeconomic backgrounds often require financing at the outset, which usually comes in the form of complex collateral and contractual agreements held under the umbrella of structured trade finance.
Banks and banking institutions are the major lenders in structured trade finance transactions. In some ways, these transactions are similar to loans in that traders usually receive money up front, but they are set up very differently. Rather than having a due date for repayment, banks set up ongoing repayment plans, wherein invested capital and foreign credit payments cycle money back into the structured trade instruments as the trade is completed and matures.
There usually are two main structured trade finance formats. The first format centers on a working capital guarantee, which essentially is a cash payment up front for the assessed value of the commodities that are to be traded. This kind of plan is popular for traders in developing countries or in countries that don't have stable credit. It can be difficult for this kind of exporter to shore up enough support to pay the fees so often involved with exporting on the front end: amassing the commodity, processing it and arranging for its shipment, to name a few. The costs associated with contracting and dealing with the importer usually are factored in as well.
The second type of structured trade finance focuses on receivables, which are leveraged against the strength of the foreign contracts. In these cases, it is not the value of the actual goods that is being assessed, but rather the value of the import/export agreement itself. Leveraging the contract instrument allows traders to keep control over their goods and the attendant pricing structure while mitigating risks with foreign creditors. Most of the time, this sort of plan is entered into by importers and exporters who are on similar financial footing or where the exporter’s credit is perceived to be more dependable.
Individuals and corporations that are 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 trade agreement limits financial risk, and in many ways is a securitization measure. Imports and exports are often perceived to be guaranteed when backed by a structured plan. Financing complex transactions helps protect a trader’s financial assets, which can help control market prices and, in turn, can help keep costs consistent for consumers.
