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A physical commodity trade needs cash before it makes cash. The supplier wants to be paid or secured before loading, and the buyer wants the goods before paying. Trade finance closes that gap, but no single product suits every deal.
This guide sets out the eight funding structures lenders use most for physical trades in energy, metals and agricultural commodities. For each one, it explains how the money flows, who it suits, how the structures compare and what lenders need to see before they fund.
Commodity trade finance is secured by the goods and the contracts around them, not only by the trader's balance sheet. Lenders follow the cargo from purchase to sale, take control of shipping documents or stored inventory, and are repaid from the buyer's payment. That is why it is called self-liquidating finance.
The right structure depends on four things. Where the goods are in the cycle, from pre-production to storage to shipped. Who the counterparties are and how much they trust each other. How often you trade the same flow. And how much of your own capital is in the deal. Our pillar page on physical commodity trading and structured trade finance covers the wider market.
The buyer's bank issues a letter of credit in favour of the seller. Once the seller ships and presents shipping documents that comply with the credit's terms, the bank pays. The seller ships knowing a bank stands behind payment, and the buyer only pays against documents showing the goods were shipped.
Best suited to first trades between counterparties who do not yet trust each other, and cross-border deals where the seller needs bank-backed payment security before loading.
A lender advances funds to a producer or exporter against a signed export contract with a named offtaker. The loan is repaid directly from the proceeds of the shipments, which are paid into an account the lender controls. Our guide to pre-export finance for commodity producers covers the structure in detail.
Best suited to miners, refiners and agricultural exporters with a production track record and a creditworthy buyer under a multi-shipment contract.
The buyer, usually a trading house, pays the producer upfront for future deliveries. The buyer typically funds the prepayment through a bank or fund, and is repaid in product rather than cash. See prepayment finance in commodity trading for how the risks are shared.
Best suited to producers that need working capital or capital expenditure funding, paired with an established buyer that wants to secure long-term supply.
A revolving credit facility sized against the trader's eligible inventory, receivables and hedged positions. The available amount is recalculated as the book changes, with lower advance rates on riskier assets. Our page on borrowing base facilities for physical commodity traders explains how lenders set those rates.
Best suited to established traders running repeat flows, with audited accounts, a risk management function and clear stock and hedging reports.
Goods stored in an approved warehouse or tank farm are pledged to the lender, and a collateral manager controls their release. The trader draws cash against the stock while it waits for a buyer or a better price. Compare the options in warehouse vs tank receipt financing.
Best suited to traders holding storable commodities such as grains, metals or oil products in recognised storage, who need to release cash tied up in stock.
The trader sells inventory to a financier and agrees to buy it back at a fixed price on a set date. Because the financier holds title to the goods rather than a security interest, pricing can be sharper than a secured loan. See commodity repo financing for how the transaction is documented.
Best suited to liquid, exchange-traded or easily priced commodities held in approved storage, where the trader wants short-term funding at competitive cost.
Once goods are shipped on deferred payment terms, the seller sells or discounts the receivable to a bank or fund and is paid today instead of in 60, 90 or 180 days. Combined with trade credit insurance, it lets sellers offer open account terms to buyers without carrying the credit risk themselves. Our page on commodity receivables financing covers the options.
Best suited to sellers with creditworthy buyers who want payment terms, and exporters looking to free up working capital tied up in invoices.
Specialist funds finance transactions that banks decline because of ticket size, jurisdiction or a short track record. They tend to charge more than banks and apply tighter controls over cargo, documents and cash, but they move faster and take on deals outside bank appetite. Our guide to commodity trade finance lenders covers who is active.
Best suited to mid-sized traders and producers in emerging markets, and deals that need funding beyond what a bank will commit.
| Structure | Stage funded, security and repayment |
|---|---|
| Documentary letter of credit | Shipment. Secured by shipping documents, paid by the buyer's bank on compliant presentation. |
| Pre-export finance | Before production or shipment. Secured by the export contract and assigned proceeds, repaid from shipments. |
| Prepayment finance | Before production. Secured by the supply contract, repaid in delivered product. |
| Borrowing base facility | Whole trading cycle. Secured by inventory, receivables and hedges, revolving. |
| Inventory and warehouse receipt finance | Storage. Secured by pledged stock under collateral management, repaid on sale. |
| Commodity repo | Storage. Financier holds title, repaid on buyback at a fixed price and date. |
| Receivables finance and forfaiting | After shipment. Secured by the buyer's payment obligation, repaid when the buyer pays. |
| Private credit and trade finance funds | Any stage. Secured by goods, contracts and cash controls, priced above bank debt. |
Many traders combine structures. A trader might buy on a letter of credit, hold stock under a repo, and sell on deferred terms backed by receivables finance, all within one trade.
Commodity trades are capital intensive, and lenders have seen every version of the paper deal. Chains of intermediaries with no money in the trade, sellers who cannot show control of the goods, buyers who will not confirm their identity and requests for 100% financing are declined before they reach credit. A trade gets funded when the lender can see the goods, the contracts, the cash flow and the people behind them.
Before approaching any lender, run your deal through our 8 tests of a physical commodity trade's bankability.
| Document | Why lenders need it |
|---|---|
| Sale contract or offtake agreement | Shows a named, creditworthy buyer and the source of repayment. |
| Supply contract and proof of goods | Shows the seller owns or controls the cargo you are buying. |
| Financial statements and trading history | Shows you can perform and have closed similar trades before. |
| Your capital in the deal | Shows how much margin, equity or first loss you are contributing. |
| Logistics, inspection and insurance | Shows how the goods move, who checks quality and quantity, and how the cargo is insured. |
| KYC for your company and its owners | Required by every lender before credit review starts. |
Financely is a debt advisory and arranging firm, not a lender. We work for traders and producers on their side of the table and do three things.
We test the trade. We review your contracts, counterparties, logistics and capital, and tell you plainly what a lender will flag before it goes to credit.
We choose the structure. We match the funding route to the commodity, the stage of the trade and your track record, through our structured commodity finance service.
We arrange it with lenders who fit. We approach banks and funds from our network of more than 12,700 verified capital providers whose mandate matches your commodity, route and ticket size.
Send us the commodity, the route, your counterparties and your capital in the deal. We will set out the structure we recommend, the scope of work and our fee to arrange it.
The main structures are documentary letters of credit, pre-export finance, prepayment finance, borrowing base facilities, inventory and warehouse receipt finance, commodity repo, receivables finance and forfaiting, and funding from private credit and trade finance funds.
Rarely. Lenders expect the trader to put its own capital into the deal, through a cash margin, equity or a first-loss position. Requests for 100% financing with no trader capital are usually declined.
First-time traders usually start with transaction-by-transaction structures, such as letters of credit or funding from a specialist trade finance fund, because borrowing base facilities require a trading history and audited accounts.
Lenders check the sale and purchase contracts, the seller's control of the goods, the buyer's creditworthiness, logistics, inspection and insurance, the trader's own capital in the deal and full KYC on every party.
No. Financely is a debt advisory and arranging firm. We structure commodity trade finance and arrange it with lenders from our network of more than 12,700 verified capital providers.
This article is for general information only and does not constitute legal, tax or investment advice. Financely is an advisory and arranging firm, not a lender or broker-dealer. Any financing is subject to lender underwriting, due diligence, KYC, AML and sanctions screening, credit approval, documentation and conditions precedent, and no outcome or closing timeline is guaranteed.
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