Structured trade finance (STF), a type of debt finance, is used as an alternative to conventional lending. This form of finance is utilized regularly in developing countries, as well as, in relation to cross border transactions. The objective is to encourage trade by making use of non-standard security. STF is generally used in high-value transactions in bilateral trading relationships. As a more complicated type of finance, STF is commonly related to commodity trading.
Within the commodity sector, STF products are most prevalent. It is used by producers, processors, traders, as well as, end-users. These financial arrangements are tailor-made by banking organizations to meet the precise needs of the clients. STF products are primarily working capital financing, warehouse financing and pre-export financing. There are also some institutions that extend reserve-based lending, as well as, finance the conversion of raw materials into products, along with other customized financing products. In order to promote trading activities, STF products are extended across the supply chain.
STF structures are sponsored by limited recourse trade finance lines. The structure aims at offering better security mechanism and to act as an enhancement on the position of the borrower when viewed in isolation.
How Has Technological Advances Completed STF?
Trade credit insurance, bank guarantees, letters of credit, factoring and forfeiting are some of the STF products that have been positively affected by the latest technological advances. These products have changed due the recent developments. The massive progress in communication and information domains have also helped the banking institutions to track the physical risks and events in the supply chain between the exporter and the importer.
Why are STF Facilities Used?
Structured trade finance products are used so that the risks related to trading in specific country and different jurisdictions can be mitigated. Any transaction together with STF products help to add resilience to the trade and the same can not be said when looking at financing the individual elements of a trade. Moreover, it allows for lending the payment time, strategizing procurement, diversifying funding and enhancing the ability for clients to boost the facility sizes.
What makes STF extremely attractive is that the borrower's strength in the transaction is not scrutinized as closely as compared to a vanilla loan. Here, the focus is more on the structure and the underlying cash flows. Another reason for STF's popularity is that the transactions are not reflected in the balance sheet of a company and the presence of this financing option has helped several importers to maintain flexible credit terms with exporters.
In recent years, structured trade finance products coupled with the recent advances in technology are considered as the fundamental reasons for the increasing volumes of international trade.