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  • 10.5.1-RISK AND THE RELATION TO TRADE CREDIT-GENERAL CONDITIONALITIES FOR CREDITS - THE BASICS

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  • General conditionalities for credits - the basics

     
     
    When banks and other institutions finance trade in coffee they indirectly but automatically share in all these risks. Clearly their assessment of the degree of risk presented by each borrower or type of operation plays a role in determining the credit line (the amount of finance to be provided), and what conditions and costs will apply.

    As well as setting a limit on the amount of finance to be provided, banks will also stipulate under what circumstances and for which purposes funds may be drawn. For example, funds meant for trading coffee may not be used to finance other operations.

    As a rule, international banks will only finance the trade in coffee in foreign currency (in most cases in United States dollars), and under an agreed set of pre-conditions including limits on a borrower's total exposure to open and other risks, and a predetermined programme of actual transactions. The exact credit structure will depend to a large extent on an individual borrower's solvency, balance sheet and general standing. As a general rule though smaller operators are likely to be subject to more stringent controls than substantial and well-known companies. Banks will also clearly distinguish between, and assess separately, the price (value) risks and the physical (goods) risks inherent in each lending operation.

    Trade or commodity banks provide short-term credit to finance transactions from the purchase of stocks through to the collection of export proceeds. Usually this means the credit is self-liquidating - funds lent for the purchase of a particular tonnage of coffee must be reimbursed when the export proceeds are collected.

    Credit buys stocks that turn into receivables (invoices on buyers, usually accompanied by documents of title such as shipping documents) that generate incoming funds which automatically offset the original credit.