Financing instruments

There appear to be dozens of commodity-finance structures. There are really only a few, distinguished by what stage of the trade they finance and where repayment comes from. Learn those two axes and the catalogue collapses.

The organising question: what repays this?

Self-liquidating structures are the safest and the most operationally demanding, because the security is only as good as the control over the goods and the proceeds.

By stage of the trade

Before the goods exist — production finance

Prepayment / pre-export finance. A financier or buyer prepays a producer in exchange for future deliveries or repayment out of future sales. The exposure is to production itself: failure, country risk, offtake dispute.

Offtake finance. Locks in access to production. Repayment can be in physical delivery rather than cash, which is why an offtake contract is a financing instrument and not merely a sales contract.

Streams and royalties. An upfront deposit buys a percentage of future metal at a fixed delivery payment (a stream), or a percentage of revenue net of smelting and refining charges (a net smelter return royalty). These are the longest-dated instruments in the industry.

While cash is out — purchase and inventory finance

Transactional / self-liquidating trade finance. The financier supplies the working capital for a specific purchase and is repaid from that trade's own sale.

Inventory / warehouse-receipt finance. The lender advances against eligible inventory held in an approved warehouse or controlled custody arrangement. The formula is inventory + custody control + haircut, and every word carries weight — inventory without control is not collateral.

Repo. Title transfers outright with an agreed repurchase, which sidesteps some security-perfection questions and creates others.

Borrowing base / revolving facility. The permitted exposure is recomputed as inventory and receivables move, rather than fixed at drawdown. This is the structure that matches a repeating trade cycle, and the one where advance rate and eligibility rules do the real work.

After the sale — receivables finance

Receivables discounting and factoring. Cash is advanced against invoices already owed by buyers. The credit shifts from the borrower toward the buyer, which is why buyer approval and credit insurance matter more here than collateral does.

Supplier finance. A buyer's credit standing is used to pay its suppliers early. Commercially this strengthens strategic suppliers; financially it converts supplier risk into buyer risk.

Forfaiting. Purchase of a term receivable without recourse to the seller — the point being that the seller is genuinely out of the risk.

Documentary instruments — the promise layer

Letters of credit (sight, usance, confirmed, standby) and documentary collections (documents against payment, documents against acceptance) do not supply money so much as restructure who must be trusted. A confirming bank's promise replaces an unfamiliar buyer's promise.

Demand guarantees and standbys pay against a conforming demand rather than against proof of underlying default — which is precisely why the documents examined must conform exactly.

The recurring feature across this family: conformity is a documentary test, not a factual one. A discrepant bill of lading defeats a claim even when the goods arrived perfectly.

The two coordinates that price the structure

Advance rate — what fraction of collateral value may be drawn. Haircut — the remainder, which absorbs price moves, liquidation costs, assay differences and plain uncertainty. A worked example in our sources runs a 70% maximum advance against $10m of eligible gold, capping debt at $7m with a 30% haircut; a shorter-tenor custody-backed facility runs 50%.

A haircut is not a fee and not a reserve. It is the lender's estimate of the gap between NAV and liquidation value, and it must be set against liquidation value and recovery time, not against carrying value.

Aggregation is a different business

Once credit is aggregated or distributed, you leave trade finance and enter structured finance. The purpose is to separate the operating borrower from the investment claim: an SPV owns the assets, and a waterfall allocates cash and losses by explicit rules across senior, mezzanine and junior/first-loss.

This is where most of the tokenization discourse actually lives, and it is worth being precise that it is a distribution technology. It changes who holds the claim; it does not improve the claim.

Where these are formalized

Of the 100 archetypes in the encyclopedia, 29 run as executable Lean instances. The instanced families are documentary credits and collections, open-account structures (trade loan, receivables discounting, factoring, supplier finance, forfaiting), structured commodity finance (producer prepayment, warehouse-receipt finance, commodity repo, securitization), production finance (metal stream, production payment, NSR royalty), risk transfer (funded participation, whole-turnover credit insurance), derivatives (physical and financial forwards, futures with margin, Asian options, warrants, electronic bills of lading) and pool tranching.

Record-only — structure fixed, not yet executed — includes borrowing base, pre-export finance, offtake-linked prepayment, tolling, inventory finance, collateral- and stock-management agreements, non-payment and political-risk insurance, reinsurance and ECA guarantees. Equipment sale-and-leaseback has no record at all.