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 and in connection with cross-border transactions. The aim is to promote trade by taking non-standard security measures. STF is generally used for high-quality transactions in bilateral trade relationships. As a more complicated form of financing, STF is often associated with commodities trading.
STF products are the most common in the raw materials sector. It is used by manufacturers, processors, dealers and end users. These financial agreements are tailored by bank organizations to the exact needs of customers. STF products are mainly working capital, warehouse and pre-export financing. There are also some institutions that are expanding reserve lending and funding the conversion of commodities to products and other bespoke financial products. In order to promote trading activities, STF products are expanded across the entire supply chain.
STF structures are sponsored by limited trade finance lines. The structure aims to provide a better security mechanism and to improve the position of the borrower in isolation.
How has technological progress complemented the STF?
Commercial credit insurance, bank insurance, letters of credit, factoring and expiry are some of the STF products that have been positively influenced by the latest technological advances. These products have changed due to recent developments. The massive advances in communications and information have also helped banking institutions track the physical risks and events in the supply chain between exporter and importer.
Why are STF facilities used?
Structured trade finance products are used to mitigate the risks associated with trading in a particular country and jurisdiction. Every transaction with STF products helps to increase the resilience of the trade, and this cannot be said when it comes to financing the individual elements of a trade. It can also extend payment times, strategize procurement, diversify funding, and improve opportunities for customers to increase the size of the facility.
What makes STF extremely attractive is that the strength of the borrower in the transaction is not as carefully compared to a vanilla loan. The focus here is more on the structure and the underlying cash flows. Another reason for STF’s popularity is that the transactions are not reflected in a company’s balance sheet, and the presence of this funding option has helped several importers maintain flexible credit terms with exporters.
In recent years, structured trade finance products, combined with the latest technological advances, have been seen as fundamental reasons for the increasing volume of international trade.