What Is Structured Trade Finance And Why To Use It?
Structured trade finance is an alternative lending option, and it is a type of debt finance followed by many businesses. It has been used for cross-border trade with a proper structure in place. There are more things to know about it, and it has been explained below:
What is structured trade finance?
Structured trade finance is a kind of debt finance that is followed by alternative finance solutions. Such kind of finance method is generally used in the case of cross-border transactions and developing countries. This kind of Trade Finance is used in place of conventional banking in order to promote bi-lateral trade relationships with high-value transactions using non-standard security measures.
The structured trade finance method is used by many trading houses, organizations, banks, etc. STF or Structured trade Finance is a complex type of finance and is usually used for commodity trading of large quantities or products of high-value. Such kind of finance is agreed between two parties in a bilateral trading relationship by forming a proper structure.
The commodity sector majorly follows this kind of trade finance and it is mainly used by producers, processors, traders, and consumers. However, not all are provided with the same kind of package, it varies based on the need. Say, for example, you will find here pre-export finance, warehouse financing, borrowing base financing, etc. Now the parties taking up the money are self-liquidating. This means that they will get their money back once the products are exported or sold out. So in such cases, money is lent based on the set business trade cycle.
The structured trade finance enjoys the support of limited recourse trade finance ways and focuses mainly on product flows cross-border. If we look at the whole structure, you will understand that it comes with a good enhanced security mechanism and this helps to support borrowers in a good sense.
Why go for structured trade finance options?
The main idea behind going for structured trade finance solutions is to get rid of all the risks that come with trading in a specific country or different jurisdictions. Such structures in the transaction help to have better resilience to the trade business. It even helps with diversifying the funds, lengthening the payment times, enhancing the ability of the clients to increase the size of their facilities, and strategic procurement.
One of the reasons why structured trade finance is found to be attractive is that compared to the loan, the capability of the borrower who is part of the transaction is not much looked at. Here the main focus remains on the underlying business cash flows and the structure.
What makes structured trade finance important?
In a general scenario, structured trade finance is used for different kinds of lending. In this kind of lending, financings are structured in a different manner for the business with the aim of maintaining an independent structure that can work on its own. In order to make this work, different mechanisms are put together and this includes the role of insurance and a collateral manager and an escrow agent.
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In any relationship, agreement plays a key role. Such agreements must be governed by underlying covenants and by clear contracts. It needs to have clearer governing law clauses set, roles of the parties must be defined, and clauses must be enforceable. Such agreements will mainly focus on security documents and here priorities are clearly set in terms of asset charges, charges on the property, debentures, SBLCs, and guarantees.
Different types of structured trade finance
Structured trade finance is divided into a few types namely:
Final thoughts
The role of such trade finance is said to elevate in the coming years. Such trade options were said to be easy to liquidate and relatively safe in the times when there was very much dip in the trading activities. Trade finance products have proved beneficial for emerging economies and it will keep doing the same in the future too.