Gold dipped in choppy trading on Friday as traders cashed in
gains from the metal’s rally to 3 – 1/2 – month highs this week and as the dollar rose even after weaker – than – expected U.S. payrolls data for December. The metal remained on track for a fourth straight weekly gain, something it has not done since Apr il although it posted an annual increase of 13 percent in 2017. The U.S. December non – farm payrolls report was weaker than expected. The dollar dipped briefly, then rose as investors reckoned the data would not deter U.S. Federal Reserve from raising interest rates multiple times this year though at a gradual pace. Traders overall stuck to their conviction that the Federal Reserve will raise rates at least twice this year, a Reuters analysis of fed funds futures contracts traded at CME Group suggested. Gold is highly sensitive to rising U.S. interest rates, as these increase the opportunity cost of holding non – yielding bullion while boosting the dollar, in which it is priced.
Structured trade finance (STF), a type of debt finance, is used as an alternative to conventional lending. This form of finance is utilized regularly in developing countries, as well 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 type of finance, STF is commonly related to commodity trading.
Within the commodity sector, STF products are most prevalent. It is used by producers, processors, traders, as well as, end-users. These financial arrangements are tailored by banking organizations to meet the precise needs of the clients. STF products are primarily working capital financing, warehouse financing, and pre-export financing. There are also some institutions that extend reserve-based lending, as well 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.
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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 to the recent developments. The massive 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 a 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. Moreover, it allows for lengthening the payment time, strategizing procurement, diversifying funding and enhancing the ability for clients to boost 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 underlying 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 maintain flexible credit terms with exporters.
In recent years, structured trade finance products coupled with the recent advances in technology are considered as the fundamental reasons for the increasing volumes of international trade.
Without trade finance, there wouldn’t be Indian spices, clothes, or jewelry in the United States. Or Apple’s iPhones in China, much less any other international product at any respectable distance from its origin.
In fact, according to Investopedia, the World Trade Organization (WTO) estimates that international world trade has expanded 80%-90% thanks to trade finance.
For this to continue, companies need to include trade finance in their business development strategies.
How do you do that? Learn how you can incorporate trade finance into your business development strategy.
Incorporate Inland Trade Finance in Market Penetration and Market Development
Market penetration and market development are key parts of a business development strategy. Market development involves selling more of your service or product to repeat customers.
While market penetration is about expanding your product or service to other cities and provinces, it can involve inland trade finance. As you may have to renegotiate local and provincial trade deals.
For instance, let’s say you sell jewelry. A business from a neighboring city may purchase your jewelry and sell it to its customers.
You have a long history with this client. And know that your product is selling quickly in your customers’ shop. In which case, you could propose selling the client more jewelry for a bulk price.
After negotiating, the client agrees. However, despite the long, positive history you’ve had with the client, the client may not feel comfortable paying you before you export the jewelry.
This is where a trade financier or banking institution comes in, providing a letter of credit promising that you will export the jewelry upon payment.
Consider the Internet and Brick-and-Mortar Stores
If you’re already selling more of your product or service to clients, perhaps it’s time to branch out to another channel such as the Internet?
If you run a successful e-commerce store, maybe it’s time to start a brick-and-mortar store as well?
That way, your customers have more options where to buy your products.
Especially when it comes to brick-and-mortar stores, trade finance can help you secure new import and export trade deals-especially when there are multiple currencies involved.
Creating a New Product or Service for Repeat and New Customers
With repeat customers, you’re doubling the number of products the repeat client is importing.
And, with new clients, your new product or service will expand your client base. It’s important that you first create new products for your repeat customers before jumping to new customers, as it involves more risk.
Again, trade finance can help cultivate more trust during this period of growth. Since trade financiers or banking institutions can create letters of credit, laying out the terms the importer and exporters must follow.