12 Key Questions Financely Asks Before Underwriting Trade Finance Opportunities
At Financely, our underwriting process for trade finance opportunities requires precision, clarity, and an awareness of the complexities inherent in global trade. Each transaction brings unique risks and considerations, and while no process can eliminate uncertainty completely, asking the right questions significantly reduces surprises.
Here are the 12 critical questions our underwriting team at Financely consistently asks before structuring a Trade Finance Note:
1. Who are the counterparties involved?
We begin by clearly identifying the buyer and seller. Understanding the history, reliability, financial health, and reputation of each party is foundational. This helps anticipate potential payment risks and operational challenges.
2. What commodities or goods are being financed?
The nature of the commodity impacts everything — its market value stability, price volatility, storage and transportation requirements, and liquidity. Not all commodities carry the same risk profile; cocoa beans differ greatly from electronics.
3. Where exactly are the goods coming from, and where are they headed?
Knowing the trade route helps assess political risks, regulatory hurdles, and logistical challenges. Financing a shipment from a stable jurisdiction is inherently different from navigating less predictable regions.
4. Is there an existing purchase contract with a confirmed end buyer?
Confirmed purchase agreements significantly reduce repayment risk. Still, assessing the strength and enforceability of these agreements across jurisdictions is crucial.
5. How will the goods be transported?
Understanding the logistics — including mode of transport (sea, air, or road) — is critical. Risks vary based on distance, infrastructure quality, weather conditions, and geopolitical stability along the transport route.
6. Who is insuring the cargo, and what exactly does the policy cover?
Adequate insurance is non-negotiable. But insurance policies vary greatly in coverage; it’s critical to scrutinize exclusions, deductibles, and claim procedures thoroughly.
7. Are there any collateral or security instruments backing the transaction?
The presence of collateral such as warehouse receipts, standby letters of credit, or performance guarantees materially reduces investor risk. Each instrument’s enforceability in specific jurisdictions is key.
8. What’s the currency exposure involved?
Currency fluctuations can quickly erode profitability or investor returns. Understanding hedging strategies or currency risk mitigation measures is essential for reliable returns.
9. How long is the transaction cycle, from funding to repayment?
Shorter transaction cycles generally reduce risk exposure. Yet, we must balance this with the operational realities of certain commodities or destinations that naturally require longer cycles.
10. What is the historical performance of similar past transactions?
Examining track records, default rates, and repayment histories provides valuable context. While history doesn’t guarantee future outcomes, patterns often emerge that inform decisions.
11. Who holds title to the goods at each stage of the transaction?
Clear title ownership at every step ensures investors retain priority claims in the event of default or disputes. Cross-border transactions may introduce legal complexities here, so clarity is essential.
12. What regulatory or compliance considerations might affect the transaction?
International trade finance inevitably intersects with multiple jurisdictions, each with distinct regulatory frameworks. Anticipating potential legal or compliance hurdles helps minimize disruption.
First Draft of a Financely Trade Finance Note (Example)
Financely Structured Trade Finance Note
Issuer:
Trade Finance SPV, Delaware, USA
Purpose:
Funding the purchase of Copper Cathodes from suppliers in the Democratic Republic of Congo (DRC) for sale to confirmed buyers based in Antwerp, Belgium.
Face Value of Note:
USD 2,500,000
Maturity:
90 days from the date of issuance
Interest Rate:
9% per annum, payable at maturity
Collateral/Security:
- Warehouse Receipt confirming title and location of the goods
- Confirmed Purchase Agreement with established buyer in Belgium
- Standby Letter of Credit from a reputable European financial entity
Currency:
U.S. Dollars (USD)
Transaction Flow:
Funds raised from investors will directly finance the acquisition of copper cathodes, secured in a bonded warehouse in the DRC. Upon completion of shipment and delivery to the confirmed buyer, proceeds from the sale are deposited directly into the SPV’s account, ensuring repayment of principal and interest to investors.
Risk Disclosure (Acknowledging Complexity):
Investors should be aware of inherent risks, including logistical disruptions, political or regulatory changes in jurisdictions involved, currency fluctuations, and potential delays due to unforeseen circumstances in international trade. While collateral and established contracts mitigate these risks substantially, uncertainties cannot be fully eliminated.
At Financely, transparency and meticulous risk assessment form the backbone of every underwriting decision. While complexity and uncertainty remain part of the trade finance process, asking these critical questions consistently allows us — and our investors — to enter each transaction confidently and well-informed.
Interested in learning more about our underwriting process or specific trade finance opportunities? Reach out to Financely’s advisory team today.
