Realizing how important part trade finance plays in physical commodities trading, I would like to write shortly about the factors banks and financial boutiques pay attention to when financing cross border commodities trade. Knowing the key factors makes it possible to adjust them within the limits of our business according to the expectations of financiers. Here I will start with the basics and in following articles on this blog I will strive to elaborate on more complex issues trade finance is concerned with, such as structured trade and commodity finance.
There is no better argument when negotiating advance financing than a proven track record. What we need to show is that we have done it before. That we have been in business, and that we have a capacity to deliver. How can we do this? Simply by presenting financial track record or our bank statements showing the incoming and outgoing cashflows.
Another important thing when we look for advance financing is to prove to the bank that we are not going out of business any time soon. One of the ways to prove it is to show that we are profitable, that it is not in our interest to back out when they open a Letter of Credit for us. Banks also may want to know about the state of our tax affairs and on how we handle our situation with other suppliers. If everything is in order in these departments, we are in stronger position to negotiate the more advantageous terms.
Presenting a credit history is mainly a significant factor because of the insurance banks seek to apply to such transactions. They can present our credit history to their underwriter and get better terms, what implies better terms for us.
It also works good to start small with our new financial partner, build trust and reliance on smaller trades and slowly proceed towards larger ones. So it is not only about our track record, but a track record with a given financial partner.
If our trade financing relies on existing purchase order, it is beneficial if our buyer is ready to communicate with our financial partner. So the prove of the purchase order is not only a document issued, but that there is a direct assurance from the side of our buyer, even if not contractual one, to perform.
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