Structured trade finance (STF), a type of debt financing, is used as an alternative to conventional lending. This form of financing is used regularly in developing countries, as well as in connection with cross-border transactions. The aim is to promote trade using non-standard security. STF is typically used in high value transactions in bilateral trade relationships. As a more complex type of finance, STF is usually associated with commodity trading.
In the commodity sector, STF products are the most common. It is used by producers, processors, traders, as well as end users. These financial arrangements are tailored by banking organizations to meet the exact needs of customers. STF’s products are mainly working capital financing, warehouse financing and pre-export financing. There are also some institutions that expand reserve-based lending as well as finance the conversion of raw materials into products, along with other personalized financial products. To promote commercial activities, STF products are being expanded throughout the supply chain.
STF structures are sponsored by lines for limited recourse financing of trade. The structure aims to offer a better security mechanism and to act as an improvement on the borrower’s position when viewed in isolation.
How has technological progress complemented the STF?
Commercial credit insurance, bank guarantees, letters of credit, factoring and confiscation are some of STF’s products that have been positively influenced by the latest technological advances. These products have changed due to recent developments. Significant advances in communication and information have also helped banking institutions to monitor physical risks and developments in the supply chain between the exporter and the importer.
Why use STF equipment?
Structured trade finance products are used so that the risks associated with trade in a particular country and different jurisdictions can be mitigated. Each transaction together with STF products helps to add sustainability to trade and the same cannot be said when considering the financing of the individual elements of a transaction. Moreover, it allows for longer payment times, the development of procurement strategies, the diversification of funding and the improvement of customers’ ability to increase the size of facilities.
What makes STF extremely attractive is that the strength of the borrower in the transaction is not considered so carefully compared to a vanilla loan. Here the emphasis is more on the structure and the main cash flows. Another reason for the popularity of STF is that transactions are not reflected in a company’s balance sheet and the availability of this financing option has helped several importers to maintain flexible credit terms with exporters.
In recent years, structured trade finance products, combined with recent advances in technology, have been considered the main reasons for the growing volume of international trade.