Structured Trade Finance (STF), a type of debt financing, is used as an alternative to traditional lending. This form of financing is used regularly in developing countries, as well as in connection with cross-border transactions. The goal is to encourage commerce by taking advantage of non-standard security. STF is generally used for high-value transactions in bilateral business relations. As a more complex type of financing, STF is usually associated with commodity trading.
In the commodity sector, STF products are most prevalent. It is used by producers, processors, and dealers as well as end users. These financial arrangements are designed by the banking institutions to meet the exact needs of the clients. STF products are primarily working capital financing, warehouse financing, and pre-export financing. There are also some institutions that offer reserve-based lending, as well as financing the transformation of raw materials into products, along with other customized financing products. In order to boost business activities, STF products are expanded across the supply chain.
STF structures are sponsored by limited back-to-back commercial financing lines. The structure is intended to offer a better security mechanism and act as a reinforcement of the borrower’s position when viewed in isolation.
How have technological developments supplemented STF?
Trade credit insurance, bank guarantees, letters of credit, factoring and forfeiture are some of the STF products that have been positively affected by the latest technological developments. These products have changed due to recent developments. The huge advances in communication and information have also helped banking institutions track risks and physical events in the supply chain between the exporter and the importer.
Why are STF facilities used?
Structured trade finance products are used so that risks related to trading in a particular country and different jurisdictions can be mitigated. Any transaction with STF products helps add flexibility to a trade and the same cannot be said when considering financing individual items of a trade. Moreover, it allows for prolongation of payment time, strategizing procurement, diversification of financing and enhancing the ability of customers to increase utility volumes.
What makes an STF so attractive is that the strength of the borrower in the transaction is not as thoroughly scrutinized as compared to a vanilla loan. Here, the focus is more on the underlying structure and cash flows. Another reason for the popularity of STF is that transactions are not reflected in the company’s balance sheet and having this financing option has helped many importers maintain flexible credit terms with exporters.
In recent years, structured trade finance products along with recent developments in technology are among the primary reasons for increasing international trade volumes.