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Structured trade finance (STF), a type of debt finance, is used as an alternative to traditional lending. This form of finance is regularly used in developing countries, as well as in connection with cross-border transactions. Its purpose is to encourage trade using non-standard security. STF is generally used in high value transactions in bilateral trade relations. As a more complex type of finance, STF is usually 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 designed by the banking organizations to meet the exact requirements of the customers. STF products are mainly working capital finance, warehouse finance and pre-export finance. There are also some institutions that offer reserve-based lending, as well as finance the conversion of raw materials into products, along with other customized finance products. In order to promote business activities, STF products are disseminated in the supply chain.
STF formations are sponsored by limited recourse trade finance lines. The purpose of the structure is to offer a better safety net and act as an enhancement to the borrower’s position when viewed in isolation.
How has technological advancement complemented STF?
Trade credit insurance, bank assurance, letters of credit, factoring and forfeiture are some of the STF products that have been positively impacted by the latest technological advancements. These products have changed due to recent developments. The huge advancement in communication and information domain has also helped the banking institutions to track physical risks and incidents in the supply chain between exporter and importer.
Why are STF facilities used?
Structured trade finance products are used to hedge the risks associated with trading in specific countries and different jurisdictions. Any transaction with STF products helps in adding flexibility to the business and the same cannot be said for looking at the financing of individual elements of a business. In addition, it allows for lengthening payment times, strategizing purchases, diversifying funding, and increasing the ability for customers to scale up the size of the facility.
What makes STFs extremely attractive is that the transaction is not scrutinized for the borrower’s strength as closely as compared to a vanilla loan. Here, the focus is more on the structure and underlying cash flows. Another reason for the popularity of STF is that the transactions are not reflected in a company’s balance sheet and the presence of this financing option has helped many importers to maintain flexible credit terms with exporters.
In recent years, structured trade finance products combined with recent advances in technology are considered to be the fundamental reason for the increasing volume of international trade.
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