Trade finance is a method that importers and exporters of raw materials and goods use to finance their business. Trade finance has been around for thousands of years, and the roots of trade finance and structured trade finance can be traced back to the early days. Trade finance existed long before global stock markets were born.
Today, trade finance is a billion-dollar business. During trading, more and more goods and raw materials are purchased and sold, meaning banks and financiers, e.g., Laddr Finance, are needed to give money to finance the buying and selling of these goods and raw materials throughout the chain supply.
Benefits of trade finance and structured trade finance
For example, imagine you are a cocoa bean merchant, buying and selling the beans locally to foreign buyers. To make purchases, you will need money to buy cocoa before it is exported. Where to get money for these purchases? And if you are an international buyer, a carrier buying from cocoa merchants.
It is where trade finance and structured trade finance come in: your business can grow and develop using the services of a dedicated trade finance department that structures trade finance structures that are meant for your needs, using the guarantee of the goods you buy. Trade, not your balance sheet or other assets.
Goods and commodities have their base value. For example, if cocoa beans cost hundreds or even thousands of dollars per ton, then one day, a large pile of beans accumulates in one place; in a warehouse or on a ship, it costs a lot of money. The bank may lend money for the full value of the beans minus the amount to take into account the price and other risks.
It is the same for any product or commercial item that can be resold. The bank grants the loan as long as the collateral “adds up” and as long as the bank is satisfied with how the transaction between the buyer and the seller is structured. The key is that if something goes wrong, the bank can take possession of the goods or merchandise and sell them to raise money to pay off the outstanding amount of the loan.
When people talk about structured trade finance, they mean transactions whereby complex mechanisms are created to ensure that a bank can take over and sell the underlying capital used for a loan; in this example, the goods and goods themselves.
Trade is a simple business, although the structures used in trade finance in more complex transactions require a lot of work for all parties involved. It is why the total loan amount of a structured business finance loan must be high enough to justify the involvement of highly paid bankers, lawyers, and other consultants.