Structured Trade Finance - What Does It Mean?
Structured Trade Finance - What Does ItMean?
Structured trade finance (STF), a type ofdebt finance, is used as an alternative to conventional lending. This form offinance is utilized regularly in developing countries, as well as, in relationto cross border transactions. The objective is to encourage trade by making useof non-standard security. STF is generally used in high-value transactions inbilateral trading relationships. As a more complicated type of finance, STF iscommonly related to commodity trading.
Within the commodity sector, STF productsare most prevalent. It is used by producers, processors, traders, as well as,end-users. These financial arrangements are tailored by banking organizationsto meet the precise needs of the clients. STF products are primarily workingcapital financing, warehouse financing and pre-export financing. There are alsosome institutions that extend reserve-based lending, as well as, finance theconversion of raw materials into products, along with other customized financeproducts. In order to promote trading activities, STF products are extendedacross the supply chain.
STF structures are sponsored by limitedrecourse trade finance lines. The structure aims at offering better securitymechanism and to act as an enhancement on the position of the borrower whenviewed in isolation.
How Has Technological AdvancementsComplemented STF?
Trade credit insurance, bank assurances,letters of credit, factoring and forfeiting are some of the STF products thathave been positively affected by the latest technological advancements. Theseproducts have changed due the recent developments. The massive progress incommunication and information domains have also helped the banking institutionsto track the physical risks and events in the supply chain between the exporterand the importer.
Why are STF Facilities Used?
Structured trade finance products are usedso that the risks related to trading in specific country and differentjurisdictions can be mitigated. Any transaction together with STF products helpto add resilience to the trade and the same cannot be said when looking atfinancing the individual elements of a trade. Moreover, it allows forlengthening the payment time, strategizing procurement, diversifying fundingand enhancing the ability for clients to boost the facility sizes.
What makes STF extremely attractive is thatthe borrower's strength in the transaction is not scrutinized as closely ascompared to a vanilla loan. Here, the focus is more on the structure and theunderlying cash flows. Another reason for STF's popularity is that thetransactions are not reflected in the balance sheet of a company and thepresence of this financing option has helped several importers to maintainflexible credit terms with exporters.
In recent years, structured trade finance products coupled withthe recent advances in technology are considered as the fundamental reasons forthe increasing volumes of international trade.
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