We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.
Finance

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

What Is the Relationship between Commodity and Trade Finance?

By Jamie Nedderman
Updated: May 17, 2024
Views: 2,905
Share

The relationship between commodity and trade finance is best understood by understanding what the two terms mean. Commodities are goods not completely unique to their producers, and trade finance is the management of funds and payments during the export and import of the commodities. This includes securing payment and obtaining verifiable shipping information, so that the transaction is relatively secure.

A commodity is something that does not differ from other same commodities, regardless of who makes or sell it. Common commodities are oil, beef, and gold, as well as grains, metals, and natural gas, many of which are raw materials for other products. Quality may be slightly different from others, but basically they are the same.

Commodity and trade finance relate to one another through international trade. As the commodities are imported and exported, trade finance manages the capital for the smoothest trading possible. An exporter wants goods prepaid or otherwise guaranteed in order to minimize risk, while the importer requires proof of shipment to minimize that risk.

The importer promises payments in various ways. One is a letter of credit, which is a drafted letter from the importer’s bank guaranteeing payment. Other methods of payment might be an open account with the exporter, and the export may participate in forfaiting, which is the sale of these accounts in order to obtain funds more quickly. Export factoring is similar, but instead sells the invoice to one of the available export credit agencies to manage collection. The credit agency may discount the invoice for the buyer to achieve swift collection.

Before making payment, the importer wants to ensure receipt of the commodity. In the case of an open account, the importer may wait until the product is received or the balance is due to make payment. If a letter of credit is drafted, a bill of lading may be required. This is a detailed list of what is included in the shipment, typically given by the carrier, which banks will likely require. Other documentation may be a contract to detail the responsibilities of all involved parties.

Commodity and trade finance go through other procedures during the transaction. Either party might require trade credit insurance. This is offered by a private insurance company to further secure the importer and exporter.

Share
WiseGeek is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.

Editors' Picks

Discussion Comments
Share
https://www.wisegeek.net/what-is-the-relationship-between-commodity-and-trade-finance.htm
Copy this link
WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.

WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.