5 Ways to Fund a Physical Commodity Transaction
A physical commodity trade needs cash before it produces cash. The supplier wants payment or security before loading, freight and insurance must be paid, and the buyer often pays weeks or months after delivery. Few traders can fund that gap from their own balance sheet on every deal.
The good news is that physical trades can be financed against the goods and the contracts themselves. Below are the five structures lenders use most, what each one needs to work, and which type of trade it suits.
Letters of Credit
A documentary letter of credit replaces the buyer's promise to pay with a bank's undertaking. The seller ships, presents compliant documents, and is paid by the bank. For a trader buying and reselling, a back-to-back or transferable LC lets the end buyer's credit support the purchase from the supplier, so the trader needs far less of its own capital.
LCs work only if the documents comply exactly. Bills of lading, invoices, certificates of origin, and inspection reports must match the credit's terms, and a single discrepancy can delay or block payment.
Best for. Cross-border trades where seller and buyer do not yet trust each other, or where the buyer's bank is stronger than the buyer. See our letter of credit arrangement and margin support.
Pre-Export Finance and Prepayment
In pre-export finance, a lender advances funds to a producer against future deliveries under an offtake contract. The buyer pays into an account the lender controls, and the loan is repaid from those export proceeds. Prepayment works the same way, except the buyer or a trading house funds the producer directly and takes repayment in product.
The credit rests on the producer's ability to deliver and the buyer's ability to pay. Lenders look closely at production history, the offtake contract, assignment of proceeds, and collection account control.
Best for. Miners, agricultural producers, and processors with a creditworthy offtaker and a track record of delivery. Read our pre-export financing guide.
Borrowing-Base Facilities
A borrowing-base facility is a revolving line sized against eligible inventory and receivables. As the trader buys goods, sells them, and collects payment, availability moves up and down with the collateral. Advance rates depend on how liquid the commodity is, where it sits, and how strong the buyers are.
These facilities suit repeat trading rather than single deals, and they come with regular reporting, eligibility criteria, concentration limits, and collateral audits.
Best for. Established traders and distributors with recurring flows and reliable reporting. See borrowing-base inventory lines.
Warehouse Receipt and Inventory Finance
When goods sit in storage before sale, the lender can advance against them using warehouse receipts issued by an approved warehouse or collateral manager. The lender controls release of the goods, so it is effectively lending against title to a specific, verified stock. Repo structures go a step further, with the financier buying the goods and selling them back later.
The value of the security depends on the warehouse operator, the legal framework for receipts in that country, insurance, and how often the stock is inspected.
Best for. Metals, grains, softs, and other storable commodities waiting for sale or shipment. See warehouse receipt financing.
Purchase Order and Receivables Finance
Purchase order finance pays the supplier on the trader's behalf against a confirmed sales order from a creditworthy buyer. Once the goods are delivered and invoiced, receivables finance or discounting can turn the invoice into cash before the buyer pays, often backed by credit insurance on the buyer.
The key tests are the strength of the end buyer, a clean contract chain, and a payment route the financier can control.
Best for. Smaller traders with a confirmed buyer but limited capital to pay the supplier. See our purchase order financing service.
Choosing the Right Structure
Most physical trades end up using more than one of these. A trader might open an LC to the supplier, hold goods under a warehouse receipt, and discount the buyer's receivable after delivery. The right mix depends on who is the strongest credit in the chain, where title sits at each stage, and how the lender will be repaid.
Whatever the structure, lenders want the same things, namely a real underlying trade, documented title, a creditworthy payer, and cash that flows back through an account they control. FG Capital Advisors structures and places these facilities for traders, producers, and importers. See our structured trade and commodity finance service, or request an estimate.
