There is a number of ways a company can finance it’s business, either based on the balance sheet of the company or on the cash flow produced by the future transactions/utilization from its assets or the specific characteristics of an individual transaction. For different cash flow structures there are different ways to structure finance requirements for companies, amongst others:
- Project Finance
- Real Estate Finance (Retail)
- Buy-out Finance
- Structured Commodity and Trade Financing
Structured Commodity Financing
Structured Commodity Financing (SCF) is a financing technique to provide assistance in the trade flow of commodities.
SCF was specifically designed for commodity producers and trading companies doing business in the developing markets. Specifically, Structured Commodity Finance provides liquidity and mitigates counter-party risks for the actors in the origination, production, purchase and sale of raw, semi-fined or semi-processed commodities.
Starting from the production stage and producers of the soft commodities to the traders, SCF supports the whole supply chain. Common element in Structured Commodity Finance is that there is an asset or a transaction facilitated, not a company or a balance sheet. There are some generic structure components in the financing arrangements, but the precise design of the financing varies with throughout the chain.
Key elements of Structured Commodity Finance
- Commodity assets with a liquid character (short term\current assets) have a financing based on face value or on market value
- Assets could comprise of contracts, stocks, guaranteed/secured pre payments, shipments, receivables, hedges etcetera
- The assets serves as a collateral to provide the financier control (security) over the goods and cash flow
- Sometimes a portfolio of assets is subject to a financing, thus not only the individual assets but also the portfolio serves as a collateral
- Depending the structure of the arrangement, hedges allocated to the assets might be an un-separated part of the collateral to the financiers
- The financier tracks the goods from procurement to sales and sometimes to receivable and/or collection (quantity, quality, location, movements)
- The financier might assume (temporary) ownership for the goods it finances trough a sale/buy back arrangement (repo)
The unique value Structured Finance can bring to commodities
In industries like the commodity trade, where assets are continuously changing in terms of value and ownership and liquidation risk, SCF is a best practice financing solution.
Moreover, Structured Commodity Finance handles the complexity and risk of financing activities and transactions much better than the common trade finance (e.g. securing payments through letters of credit) or balance sheet based financing (leveraging equity). The asset based approach support the continuously changing locations and market values of assets and can survive ownership transfers.
Structure Commodity Financing can be embedded in buyers\supplier relationships, when such is initiated by one of the trading partners. You can think here in terms of vendor managed inventory or consignment stocks. Also financiers can finance specific buyer\supplier relationships and thus enable very specific forms of supply chain financing.
How to support Structured Commodity Finance?
For an effective use of Structured Commodity Finance trade desks, logistic departments and finance departs need to work smoothly together to track and trace the composition of a commodity portfolio and the aligned financing arrangements. Tracking and Transparency on the moving components, such as quantities, qualities, asset classes, locations, counter-parties is required to leverage a structured commodity finance arrangement and to efficiently finance an asset portfolio.
As in commodity management itself, one should consider structuring its information management. Key success factor in efficiently financing a commodity business is to have the right information. A state of the art commodity trade and risk management software application like Agiblocks will be a great help.