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Structured Trade Finance – What does this mean?

2019-04-09 Finance No comment

Structured Trade Finance [STF] is a debt financing that is used as an alternative to traditional loans. This form of financing is often used in developing countries and is also related to cross-border transactions. The goal is to encourage trade by using non-standard securities. STF is commonly used for high value transactions in bilateral trade relations. As a more complex type of finance, STF is often associated with commodity trading.

STF products are the most common in the commodity sector. It is used by producers, processors, traders and end users. These financial arrangements are tailored by the bank organization to meet the precise needs of the client. STF products are mainly working capital financing, warehousing financing and pre-export financing. Other agencies have extended reserve loans and funded the conversion of raw materials into products and other customized financial products. To promote trade activities, STF products are extended throughout the supply chain.

The STF structure is sponsored by the Limited Recourse Trade Finance Line. The structure is designed to provide a better security mechanism and act as a borrower's location when viewed in isolation.

How does technological advancement complement STF?

Trade credit insurance, bank guarantees, letters of credit, factoring and confiscation are some of the STF products that are affected by the latest technological advances. These products have changed due to recent developments. Significant advances in communications and information also help banking institutions track actual risks and events in the supply chain between exporters and importers.

Why use STF facilities?

Use structured trade finance products to mitigate the risks associated with transactions in specific countries and jurisdictions. Any transaction with STF products helps to increase the flexibility of trade, and the same thing can't be said when considering financing the various elements of the transaction. In addition, it can extend payment time, develop purchasing strategies, diversify funds, and enhance customers' ability to increase facility size.

What makes STF attractive is that the strength of the borrower in the transaction is not strictly scrutinized compared to the vanilla loan. Here, the focus is more on structure and potential cash flow. Another reason for the popularity of STF is that the transaction is not reflected in the company's balance sheet, and the existence of this financing scheme has helped several importers and exporters maintain flexible credit terms.

In recent years, structural trade finance products, coupled with recent technological advances, are considered to be the root cause of the increase in international trade.

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