3 Types of Financing for Trading Commodities
Commodity trading continues to be popular but can fluctuate either up or down in price depending on economic health. When the economy faces a down period, it can be necessary to finance various goods for trading. People know commodities as goods that everyone needs to survive their day-to-day lives. Businesses and producers need these goods to be able to trade these items seamlessly.
Financing commodities becomes a great option to ensure that trading commodities such as agricultural goods and fuel can continue without issues. Commodity financing loans are short-term loans with terms of less than a year in most cases. Three main trade finance options exist to keep necessities trading smoothly.
Investors using a performance risk type of trade finance will base the loan amount on their trade receivables. The supplier is paid less than the amount of the goods upfront. Essentially, this trade financing enables commodity producers to borrow successfully against their future production.
Performance risk financing has a lot of benefits when using it for commodity financing. The emerging market sector’s risk stabilizes when using this type of Financing. If a commodity seems more volatile, this option helps mitigate that.
Borrower Base Financing
Producers may use a borrower base financing option. The company pledges some of its inventory assets to a lender. An available pool of the producer’s commodities assets determines the financing the lender extends to them.
Inventory fluctuates for commodity companies during the year. Borrower base financing is a commodity financing that will ebb and flow along with the pool of assets. This makes this financing very flexible for the borrower.
Transactional financing is a standard option for the short-term lending program for commodities. The goods being traded will serve as collateral toward the amount financed by the trading company. After the goods are sold, the loan is paid off. Transactional Financing helps when the trader needs to pay for the items upfront in full.
Lenders provide commodities financing that is self-liquidating and secured by assets being traded. It allows the producers to leverage their transactions before it occurs. Companies can buy and sell more goods when they have cash flow in place.
Many businesses or even countries need to keep cash flowing while trading. They may not have the collateral they need upfront, and commodities financing helps keep trading flowing. The company will pay back the loans later after the goods are sold.