Important Disclosure. For professional counterparties only. Informational content. Not a public offer. Any mandate is subject to underwriting, KYC/AML, sanctions screening, conflicts checks, and definitive documentation.
Trade Finance Controls: Collateral, Inspections, Account Control & Cash Waterfalls
Trade finance is control-driven credit.
Lenders are not underwriting corporate balance sheets. They are underwriting the enforceability of legal rights and the reliability of operational control points.
When a transaction fails, it almost never fails because the commodity does not exist. It fails because controls were incomplete, poorly designed, or weakly enforced.
The Control Stack Framework
Most bankable trade finance structures rely on four interlocking control layers:
- Collateral Control
- Independent Verification (Inspections)
- Account Control
- Cash Waterfall Engineering
Each layer compensates for the weaknesses of the others. Remove one layer and pricing rises or leverage collapses.
Collateral Control
Collateral in trade finance is not merely pledged. It must be identifiable, segregated, enforceable, and liquidatable.
Typical Collateral Classes
- Inventory (on-ground, in tanks, in bonded warehouses)
- In-transit cargo
- Receivables
- Contractual rights under offtake agreements
Legal Perfection
- Pledge or security interest over goods
- Assignment of receivables
- Assignment of insurance proceeds
- Notice to counterparties
Perfection without operational control is insufficient.
Operational Control
- Segregated storage
- Warehouse keeper undertakings
- Tank access protocols
- Release instructions controlled by lender or collateral manager
In practice, collateral control is usually implemented through a Collateral Management Agreement (CMA).
Independent Inspections
Inspections are the primary anti-fraud layer.
They answer four questions:
- Does the commodity exist?
- Where is it located?
- What is its quantity?
- What is its quality?
Inspection Types
- Pre-shipment inspection
- Post-shipment inspection
- On-hire / off-hire inspections
- Stock monitoring inspections
Why Lenders Require Independent Firms
- Operator self-reporting is not credit-grade
- Third-party liability matters
- Inspection firms carry professional indemnity insurance
Inspection frequency is a function of commodity volatility and jurisdictional risk.
Account Control
Account control governs where money flows and who can touch it.
Without account control, collateral control collapses.
Controlled Account Architecture
- Collection Account
- Debt Service Account
- Operating Account
- Reserve Account
Account Control Agreement (ACA)
- Bank acknowledges lender security interest
- Lender obtains blocking rights
- Borrower access is conditional
In a default scenario, lender can redirect all incoming proceeds.
Typical Triggers
- Borrowing base deficiency
- Missed inspection
- Delivery failure
- Covenant breach
Cash Waterfall Engineering
A cash waterfall is the ordered priority of payments.
It defines how every dollar is applied.
Simplified Example
- Taxes and statutory costs
- Senior interest
- Senior principal
- Mezzanine interest
- Mezzanine principal
- Junior / equity distributions
Why Waterfalls Matter
- Prevents sponsor leakage
- Protects senior lenders
- Enforces tranche hierarchy
Waterfalls are embedded inside facility agreements and intercreditor agreements.
Intercreditor Framework
Multi-tranche structures require an intercreditor agreement.
Key topics:
- Payment priority
- Enforcement rights
- Standstill periods
- Collateral sharing mechanics
Without a clear intercreditor framework, senior lenders will not proceed.
Common Control Failures
- Commingled inventory
- Uncontrolled release of goods
- Collections into operating accounts
- Inspections performed but not reconciled to borrowing base
- Waterfalls overridden by side letters
Where FG Capital Advisors Fits
FG Capital Advisors structures trade finance transactions around enforceable control stacks.
We focus on:
- Designing collateral packages
- Defining inspection regimes
- Architecting controlled account structures
- Engineering tranche-level cash waterfalls
We then place these structures with private credit and institutional lenders.
Disclaimer. Best-efforts execution. No guarantees of funding, pricing, or closing.
