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  • 10.7.2-RISK AND THE RELATION TO TRADE CREDIT-TYPES OF COFFEE TRADE FINANCE

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  • Types of coffee trade finance

     
     

    The most common types of coffee trade finance are the pre-financing of coffee to be purchased, advances against actual stock holdings, and the financing of the goods during processing for export and shipment.

    Pre-financing


    Processors and exporters engage in pre-financing to secure future supplies of particular coffees. Bank support for such deals depends very much on the track record of the parties concerned, and whether the buyer has a guaranteed sale for that coffee. It is difficult enough to obtain finance for unsold stocks, let alone for 'promised' stocks.

    This is one of the strengths of the trade houses that engage in long-term supply contracts with large roasters. They usually have a guaranteed outlet for their coffee with little performance risk and they are able to raise funds internationally, often at lower rates than those available in the producing country itself.

    As a result of liberalization measures in the 1990s, international houses have gained considerable ground in a number of producing countries, mostly at the expense of local operators. But the individual exporter who deals with importers and smaller roasters will usually find that this type of buyer is not interested in providing any kind of finance; they may even be looking for credit themselves.
     

    Collection credits and stock advances


    The main issues with collection credits and stock advances are what proportion of the value can be borrowed, what type and quality of coffee will be bought, at what prices, and how the coffee will be physically handled. It is often assumed that borrowing against stocks, or against coffees for which there is already a sales contract, is relatively risk free. But although the lender will have a formal lien over the goods, what if the weight or the quality is misstated? What if warehouse receipts are issued for non-existent goods? Of course all exporters should ask themselves and their own staff these same questions.
     

    Pre-shipment finance


    Pre-shipment finance is usually obtained when the ready goods are lodged for shipment (as pre-shipment finance) or when shipment has been made and the documents become available (as negotiation of documents). The term 'negotiation of documents' is often misunderstood - the bank merely makes an advance of all or part of the invoice value against receipt of the shipping documents, which it then presents to the buyer for payment. If the buyer does not pay, the bank has automatic recourse to the exporter because although it 'negotiated' the documents, it did not take over the non-performance risk, that is, the risk that the buyer would not pay. Letters of credit (see 10.09) are an option here, but not all buyers are willing to establish them.