Structured trade finance (STF), a kind of debt finance, is used as an different to traditional lending. This form of finance is utilized regularly in developing countries, in addition as, in relation to cross border transactions. The objective is to encourage trade by making use of non-standard security. STF is generally used in high-value transactions in bilateral trading relationships. As a more complicated kind of finance, STF is commonly related to commodity trading.
Within the commodity sector, STF products are most common. It is used by producers, processors, traders, in addition as, end-users. These financial arrangements are tailored by banking organizations to meet the precise needs of the clients. STF products are chiefly working capital financing, warehouse financing and pre-export financing. There are also some institutions that extend save-based lending, in addition as, finance the conversion of raw materials into products, along with other customized finance products. In order to promote trading activities, STF products are extended across the supply chain.
STF structures are sponsored by limited recourse trade finance lines. The structure aims at offering better security mechanism and to act as an enhancement on the position of the borrower when viewed in isolation.
How Has Technological Advancements Complemented STF?
Trade credit insurance, bank assurances, letters of credit, factoring and forfeiting are some of the STF products that have been positively affected by the latest technological advancements. These products have changed due the recent developments. The enormous progress in communication and information domains have also helped the banking institutions to track the physical risks and events in the supply chain between the exporter and the importer.
Why are STF Facilities Used?
Structured trade finance products are used so that the risks related to trading in specific country and different jurisdictions can be mitigated. Any transaction together with STF products help to add resilience to the trade and the same cannot be said when looking at financing the individual elements of a trade. additionally, it allows for lengthening the payment time, strategizing procurement, diversifying funding and enhancing the ability for clients to raise the facility sizes.
What makes STF extremely attractive is that the borrower’s strength in the transaction is not scrutinized as closely as compared to a vanilla loan. Here, the focus is more on the structure and the inner cash flows. Another reason for STF’s popularity is that the transactions are not reflected in the balance sheet of a company and the presence of this financing option has helped several importers to continue flexible credit terms with exporters.
In recent years, structured trade finance products coupled with the recent advances in technology are considered as the basic reasons for the increasing volumes of international trade.