Corporates and enterprises enter commodity trading as a means to diversify their economy. However, like any other industry, commodity trading is facing various challenges, specifically due to high turnover and low margin business. The following are the challenges in commodity trading and ways of addressing them.
Low Financial Capability
Several commodity traders who focus their time and energy on funding working capital much more than they should. Even established trading corporations tend to recycle their existing funds for their immediate needs without reaching out or exploring other financial solutions available in the market.
With the way the industry is wired to work and generate profits, there is still a lot of confusion when it comes to financing the everyday operations. Introducing commodity trade finance facilities and new financing capabilities can address this challenge.
Due to the changing nature of global commodity trade finance, financiers like large banks or funders may face some challenges. A gap between the lender and the borrower may exist because of insufficient communication. To establish firm funding processes, commodity traders must identify the right financier and communicate the exact needs. Understanding the underlying dynamics of a lender and the borrower is crucial. By introducing the trader to the right financier, the challenges about working capital as well as the unavailability of the right financial institution are addressed simultaneously.
Sometimes, traders and financing entities have a communication gap due to various reasons like market Outlook, regulatory requirements, risk appetites, etc. With different market perspectives and altering priorities on each side of the table, financiers and traders might fail to comprehend and agree on each other’s exact position. Efficient communication is critical in this scenario.
Unclear Funding Structure
Some commodity trading companies may have complex funding structures that can confuse financiers. This may also push banks and financing institutions to establish new trade financing policies to safeguard their end, which in turn affects the commodity trading industry. Transparency, proper communication, and healthy banking relationships are crucial to building trust with financiers. Having transparency is an effective presentation of the business and matching financing needs creates value.
Facilities That Need To Be Assessed
When a trading company is using up its funds much faster than it should, there is often an underlying cause. Assessing the company’s structure is vital to identify what can be improved with the existing facilities. This also determines how it’s impacting the business operations. There are specific operational areas that require internal funding and others that need external funding. Finances and facilities must be evaluated so it can benefit the company in the long run.
Delicate CTF Ecosystem Relationships
A healthy relationship between the trading firm, its financiers and commodity trade finance banks can cause positive effects on a business. When conflicts arise, it is essential to find ways to navigate such situations without letting it affect the company’s operations.
Cultivating a healthy relationship within the commodity trade finance ecosystem through trust and communication can mitigate risk and drive competitive advantage.