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Physical commodity trading is the business of buying a real cargo in one place, form or time period and selling it in another, capturing the spread after freight, financing, insurance, storage and risk costs. The margin rarely comes from calling the price. It comes from logistics, structure and the ability to fund working capital on terms that still leave a profit once every cost has been paid.
This 2026 guide maps how a physical trade moves from origination to settlement, which financing structures lenders actually use, how prepayments work, where trades break down and what a credit committee expects before it funds a book. It draws on the two reference papers Trafigura published on the industry, linked throughout and at the end.
In this guide
A physical trader earns its margin by transforming a commodity across three dimensions. Trafigura's Commodities Demystified frames the industry in exactly these terms, and it remains the clearest public description of how the large houses operate.
Moving crude from a West African terminal to a Mediterranean refinery, or copper concentrate from a Zambian mine to a smelter in China.
Storing product in tanks or warehouses when the forward curve pays for carry, then selling into a stronger later month.
Blending, refining or processing material so it meets the exact specification an end buyer or smelter requires.
The distinction from paper trading matters. A futures trader can exit a position with a click. A physical trader holds title to a cargo that must be inspected, shipped, insured, discharged and paid for, and every one of those steps carries operational and credit exposure. That is why physical trading is capital intensive and why access to finance, not market views, is usually the binding constraint on growth.
Trade finance remains structurally short of supply. The Asian Development Bank's 2025 Global Trade Finance Gap Survey puts the global gap at USD 2.5 trillion, unchanged from its 2023 estimate, and expects demand to rise as companies diversify suppliers and reroute supply chains. Reporting on the survey noted that the US dollar is still used in more than 82% of traditional trade finance transactions, while a majority of bank respondents see growing demand for local currency financing.
For mid-sized traders, three consequences follow. Bank appetite has concentrated on the strongest names and the cleanest structures, so smaller books increasingly rely on trade finance funds, private credit and offtaker-backed facilities. Tariff and sanctions regimes have made routing, origin documentation and screening a core credit question rather than a compliance afterthought. And lenders now expect live collateral visibility, from inspection reports and warehouse receipts to vessel tracking, as part of the monitoring package.
At its simplest, a financed physical trade runs two opposing flows through the trader. Cargo and title documents move from producer to end buyer, while cash moves the other way. The lender funds the purchase leg and is repaid from the buyer's payment, which is why control of documents and proceeds sits at the centre of every structure.
Every cargo passes through the same eight control points. Weakness at any one of them is where losses, and lender declines, originate. The delivery term agreed under the ICC Incoterms® 2020 rules decides who carries cost and risk at each leg, and documentary compliance at step seven is where many payments stall, often over avoidable discrepancies under UCP 600.
The right structure depends on who is borrowing, how long the cash cycle runs and what the lender can take as security. The decision tree below shows how lenders typically map a request to a product. For a deeper treatment, see our physical commodity trading and structured trade finance resource and our structured commodity finance advisory service.
| Structure | How it works and when it fits |
|---|---|
| Transactional (back-to-back) finance | A lender funds a single matched purchase and sale, repaid from the buyer's payment. Suits traders with confirmed offtake and short cycles, and is usually where a new book starts. |
| Borrowing base facility | A revolving line sized against eligible inventory and receivables, with haircuts by commodity and counterparty quality. Suits established traders with diversified flows and robust reporting. |
| Inventory finance and repo | The lender funds or buys stored product held in approved warehouses or tanks, released against sale. Suits carry trades and blending operations. |
| Pre-export finance | A loan to a producer repaid from future export receivables, assigned to the lender through an offtake contract. Suits miners and agricultural producers with creditworthy buyers. |
| Prepayment | The offtaker advances cash to the producer against future deliveries, often refinanced by a bank syndicate. Suits large producers and state-owned oil or mining companies. |
| Receivables finance | Sale or discount of invoices on creditworthy buyers, often with credit insurance. Suits traders selling on open account terms to strong offtakers. |
In a prepayment, a trader pays a producer in advance for commodities to be delivered over months or years. The producer receives upfront capital, and the trader secures long-term supply. The trader usually refinances the advance with a bank syndicate on a limited recourse basis, so the banks take producer performance risk while the trader manages logistics and marketing. The cycle below runs through each leg.
Trafigura's Prepayments Demystified, published in 2020 as an addendum to the main guide, explains these mechanics in detail and reports that the group's commodity prepayments rose from USD 700 million in 2013 to more than USD 5 billion in 2019. Its CFO also set out the firm's approach in a short video briefing. For producers, prepayment capacity depends on proven reserves or production, a bankable offtaker, clear security over export proceeds and, where state entities are involved, transparent disclosure.
Lenders assess a physical book through four risk lenses. Each needs a named control, a policy and evidence that the control is applied cargo by cargo.
Hedged on exchanges such as ICE, CME and the LME, or through swaps, so margin reflects the physical spread rather than a directional bet. Expect questions on hedging policy, position limits and when inventory is hedged.
A supplier failing to deliver or a buyer failing to pay. Mitigated through letters of credit, credit insurance, performance guarantees and disciplined counterparty limits.
Quality disputes, cargo loss, demurrage and document errors. Independent inspection, marine cargo insurance and experienced trade operations staff are the controls lenders look for.
Now at the front of every credit discussion. Origin certificates, vessel screening, routing and end-user checks must be documented for every cargo, not reconstructed after the fact.
Why most trader financing requests are declined. In our experience the credit is rarely the problem. Requests fail because the trader has no audited trading history, cannot evidence verified counterparties, has no hedging policy, or presents contracts and documents that do not match each other. Each of these can be fixed before approaching lenders.
A credit committee will not progress a commodity request until four components are in place. Missing any one of them usually sends the file back to the start.
A trade-level cash flow model. Each leg priced, with freight, insurance, inspection, financing cost and hedging shown, plus a stress case for price moves and delays.
Executed or near-final contracts. Purchase, sale, offtake and logistics agreements consistent on quantity, quality, delivery terms and timing.
A complete KYC and compliance file. Corporate documents, beneficial ownership, financial statements, sanctions screening and the trader's own compliance policies, ready for onboarding.
A security and control package. How title, collateral management, collection accounts and insurance give the lender control of goods and proceeds throughout the cycle.
Our commodity finance consulting deliverables set out how we build each of these components, and our fixed-fee Lender-Ready Package assembles the credit memo, model review, KYC file and data room into a single submission.
Trafigura's two papers are free to download and remain standard reading for anyone entering the industry or financing it.
A full guide to how trading firms source, transform, transport and finance commodities, with chapters on risk management and funding. Download the PDF.
An addendum focused on prepayment and pre-finance agreements, covering structure, participants and a Q&A on transparency. Download the PDF.
Financely structures physical commodity transactions, prepares the credit file and approaches suitable trade finance lenders from a network of more than 12,700 verified capital providers.
Share your contracts, volumes and funding need, and we will come back with a scope, fee and timeline for your transaction.
It depends on the commodity and cargo size, but lenders rarely fund 100% of a trade. Most transactional facilities expect the trader to contribute equity or margin, commonly 10% to 30% of cargo value, plus enough liquidity to cover hedging margin calls, demurrage and timing gaps.
Physical trading involves taking title to real cargoes and managing logistics, quality and settlement. Paper trading uses futures, swaps and options without delivery. Physical traders use paper markets to hedge price exposure on their cargoes.
Transactional, back-to-back finance on matched trades with strong offtakers is usually the entry point. Borrowing base facilities generally become available once a trader can show audited history, diversified flows and reliable reporting.
A prepayment is an advance from an offtaker to a producer, repaid through future deliveries of the commodity. The offtaker often refinances the advance with a bank syndicate, and repayment comes from the sale of the delivered cargoes.
This article is 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, credit approval, documentation and conditions precedent, and no outcome or timeline is guaranteed.
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