Chapter 7 Trade financing techniques
One or other party may need to fix the price
of the goods by purchasing an option or
entering into a futures contract, increasing
the complexity of the arrangement.
If the commodity is perishable, storage
costs are potentially higher. This might
also reduce the resale value if the bank or
finance provider requires a forced sale.Evaluation
Commodity finance is a useful technique
which significantly reduces credit risk
between a commodity’s producer, a trader
and the ultimate buyer. It is also an efficient
technique which aligns the provided finance
with the asset which needs to be financed.Consignment stock
A variation on commodity finance is for a
company to arrange to hold stock from its
suppliers as consignment stock. In this
case the stock held on the company’s
premises remains owned by the supplier
until such time as the company uses
it. At that point the supplier invoices
the company (this can be via a self-
billing mechanism). Under such an
arrangement the supplier is effectively
financing the company’s holdings of
stock. Any unused stock is returned to
the supplier.