DIY Investor Magazine
/
2015 Issue
28
Trade finance should be the most well known of asset
classes. Essentially, everything we consume, wear, and
use forms part of global trade, much of which is subject
in some way to financing. Trade finance is one of the
oldest forms of banking, and still today forms a large
and stable part of global banks lending.
Families, and family firms such as Flemings, Barings,
Rothschild, Hambros, Medici’s, Rathbones, Harry Tate
(Tate & Lyle), Jardine, Matheson & Co. all founded their
fortunes on trade and the financing of it
Trade and the financing of it are an old as civilisation
itself. The first records date back to the 19th century
BC, where the evidence to the existence of an Assyrian
merchant colony at Kanesh in Cappadocia (now part of
Anatolia), other highlights include:
•
The establishment of the Silk Road to finance trad
between East and West
•
The Hanseatic League secures trading privileges
and market rights in England for goods from the
League’s trading cities in 1157.
•
The Italian bank in Lombardy are founded, and cities
such as Venice and Florence become important
centres, with families such as Medici to the fore
•
Money was created to be a medium of exchange that
represented the value of goods
•
The British Empire and its famous merchant banks
and finance houses, and institution such as the British
East India Company (which received its Royal Charter
in 1600) were all founded on world trade
•
The Dutch East India Company is formed in 1602.
•
The first English outpost in the East Indies is
established in Sumatra in 1685.
•
The Cobden-Chevalier Treaty, is finalised in 1860
between the United Kingdom and France, is the
Philip Gilbert,
Head of Fixed Income & Structured Products at Beaufort Securities
considers trade finance as a potential investment.
TRADE FINANCE
first international free trade agreement; it leads to
successive agreements between other countries in
Europe.
WHAT IS TRADE FINANCE?
Trade finance is a loan that funds the sale or purchase
of goods, often across borders. The structure of that
loan might be a letter of credit, factoring and direct
lending, and, in recent years, supply chain finance - but
the practice is as old as banking itself.
Unlike corporate debt, which might be used to fund
speculative buyouts, or “general corporate purposes,”
trade finance is tied to a specific transaction, for
example, the shipment of soya beans from Brazil to the
US. Therefore:
- trade finance loans can be collateralized with the
underlying commodity itself
- Self-liquidating. Once the sale is complete, the loan is
paid off.
There are a number of safeguards that are normally put
into place to protect the lender.
•
The goods are fully insured, this is paid for by the
importer and exporter, not the lender
•
The goods are monitored by, or on behalf of, the
lender during the term of the loan
•
back-up off buyers are in-place should the original
buyer not complete for any reason
Trade finance loans are often short term, decreasing
the duration risk for investors. Depending on the sector,
the average finance period runs between 90 to 120
days.
“WORLD CAN RUN WITHOUT MONEY AND CURRENCIES BUT NOT
WITHOUT BUSINESS AND TRADE.” AMIT KALANTRI
