Structured Commodity Trade Finance: How It Works For You

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Author: Daniel John

Commodity trade finance

Commodity trade finance is a method most businessmen in the world use to finance their business especially when they go through financial crunches. Liquidity is a major factor in business when it is related to export and import of commodities. It is not always possible to receive the payment from your customers in time; but, your suppliers are required to be paid in time so that you can make fresh purchase to carry out your day to day business activities. This is when commodity trade finance comes handy for you to run your business operation without any hitch. The concept of commodity trade finance is not new; in fact, the origin of commodity trade finance can be traced back to the ancient times of Mesopotamia civilization when goods and commodities business was starting to taking its roots.

Structured Commodity Trade Finance

Structured commodity trade finance is an indispensable tool for any modern business person. Traditionally, business men used to be heavily dependent on banks for short-term and long-term loans and borrowings. However, with the burgeoning growth in the business volume and complexities of the business activities, the need for huge amount of money was felt at regular intervals. Since, the borrowings from the bank are restricted to certain limit, the businessmen started looking beyond the traditional means of trade financing. This gave birth to a whole new concept of structured commodity trade finance.

How Does it Work?

In structured commodity trade finance or simply structured commodity finance facility, the bank grants loans to the commodity producers in the market. All the terms and conditions of the structured commodity trade finance are mainly based on the suppliers' competency to produce and deliver the commodities.

In structured commodity trade finance, the bank treats the stock of commodities as collateral against the money it lends and realizes the money from the export proceeds. In the event of the inability of the borrower to repay the money, the bank takes the possession of the commodities to realize the money it had lent to its borrower. Usually, the bank sells the commodities to a buyer in OECD country. Structured commodity trade financing facility is extensively found in manufacturing or processing units and business related to the export of commodities.

Factors Considered by Banks for Structured Commodity Finance

By and large, the bank extending load as a part of its Structured Commodity finance facility conducts a comprehensive risk assessment of the business health. There are a few banks that can examine the production site as well. The supply of raw materials and infrastructures also play a critical role in bank's decision to extend the structured commodity finance facility to you. Moreover, if you enjoy a great deal of goodwill in the commodity market with regard to the factors such as punctuality and quality, then you stand a great chance of getting the structured commodity trade finance from the bank.

Daniel John Day Robinson the Managing Director of Day Robinson International, a global consultancy and training provider based in the United Kingdom which serves the international trade finance and commodities markets. He offers expert trade finance advice on Structured Trade Finance & Commodity Trade Finance as well. Apart from managing the Day Robinson Group companies in the UK and in Asia as Chief Executive, he provides consulting services in the emerging markets. For more information log on to www.dayrobinson.com.