In the world of global trade, liquidity is everything. Businesses that rely on frequent transactions—whether in commodities, FMCG, or industrial goods—often face cash flow gaps between purchasing inventory and receiving payments.

Traditional banks may offer letters of credit (LCs) to facilitate these deals, but not every trader has the upfront capital or strong banking relationships to secure one.

This is where structured trade finance notes come in—a mechanism to raise capital from investors, use it as a financial backing for an LC, and create a self-sustaining, scalable trade finance model. This blog breaks down how this works, step by step, from structuring the note to securing the LC and ensuring investor repayment.

The Problem: The Trade Finance Liquidity Gap

A trading business dealing in products like cacao, sugar, and alcoholic beverages often needs to purchase stock from suppliers in Europe but sells it to buyers in Africa. A letter of credit (LC) ensures suppliers get paid when the goods are shipped, but banks won’t issue an LC without security.

At the same time, these businesses have high-value receivables from buyers and stock sitting in warehouses. These assets have value, but they are illiquid—they can’t be easily converted into cash to fund the next deal. The solution is to raise capital using trade finance notes, then use that capital to back an LC.

Step 1: Issuing a Trade Finance Note

A trade finance note is a short-term debt instrument that raises capital from investors. Investors subscribe to the note with the expectation of earning interest over a defined period, typically 90 to 180 days.

How the Note Is Structured

1. Issuer: A trade finance company (or a special-purpose vehicle) issues the note.
2. Collateral: The note is backed by trade receivables, inventory, or a corporate guarantee.
3. Term: Typically 90 to 180 days, aligning with the trade cycle.
4. Interest Rate: Investors receive a fixed return, often 8 to 12 percent annualized.
5. Subscription: Investors buy into the note, providing the necessary liquidity.

Once the note is issued and capital is raised, it’s ready to be deployed.

Step 2: Using the Raised Capital to Back an LC

The funds from the note serve as a deposit or margin to obtain a documentary letter of credit (DLC) from a trade finance bank.

How This Step Works

1. Deposit with a Trade Finance Bank
2. A portion of the raised capital is placed in a bank to serve as a security deposit, often 10 to 50 percent of the LC value.
3. If the bank requires additional guarantees, the pledged receivables or stock assets can serve as collateral.
4. Issuance of the LC
5. With the deposit in place, the bank issues an LC payable at sight in favor of the supplier.
6. The LC guarantees that once the supplier ships the goods and submits the required documents, they will be paid.
7. Shipment and Payment Process
8. The supplier ships the goods.
9. They submit shipping documents to the bank, triggering the LC payment.
10. The supplier gets paid immediately via the LC, ensuring no delays in delivery.

At this point, the goods are on their way to the buyer, and the financing structure starts to unwind.

Step 3: Collecting Buyer Payments and Repaying the Note

Once the buyer receives the shipment, they make payment under the agreed-upon terms, typically within 30 to 90 days from the shipment date.

The Flow of Funds at This Stage

1. The buyer pays for the goods, let’s say $220,000.
2. The receivables are collected and used to settle the note.
3. Investors are paid back their principal plus interest.
4. Any remaining profit stays with the issuer.

At the end of this cycle, investors get their money back with returns, the trader secures financing for their deal, and the process can be repeated for future transactions.

Why This Structure Works for Investors and Traders

This structure solves liquidity issues for traders while offering secured, high-yield investments for investors.

For Traders:

• Unlocks capital by accessing investor funds instead of relying on personal reserves.
• Strengthens supplier relationships by ensuring payments through an LC.
• Scales up trade volumes by creating a reliable financing structure.

For Investors:

• Short-term commitment, as trade finance notes mature in 90 to 180 days.
• Asset-backed security through insured receivables or inventory.
• Higher returns than traditional bonds, often in the 8 to 12 percent range.

Key Risks and How to Mitigate Them

While this structure is effective, certain risks must be managed.

1. Buyer Payment Risk

• Problem: The buyer delays payment, affecting investor returns.
• Solution: Use trade credit insurance or conduct strong buyer credit checks before issuing the LC.

2. FX and Currency Risk

• Problem: If transactions occur across different currencies, exchange rate fluctuations could erode margins.
• Solution: Hedge the exposure through forward contracts or work in USD/EUR-based transactions.

3. Default Risk on the Note

• Problem: If the underlying trade collapses, noteholders may not get repaid.
• Solution: Pledge insured receivables and stock as security, so in case of default, investors recover value.

Scaling This Model: Making It a Revolving Structure

Instead of doing this for a one-off transaction, traders can turn it into a revolving trade finance program.

How to Make It Continuous

1. Reinvest payments from the buyer so that funds immediately back a new note issuance.
2. Issue notes on a rolling basis, rather than waiting for old notes to mature.
3. Increase trade volume over time as relationships with buyers and suppliers grow.

This turns trade finance into a structured, repeatable cycle, allowing companies to handle multiple LCs at once without relying on their own capital.

Final Thoughts

This structure combines private capital markets with structured trade finance, unlocking new ways to fund global trade. It is particularly valuable for mid-sized traders who:

• Need liquidity but lack strong banking relationships.
• Operate in high-margin, fast-moving industries.
• Have solid receivables or inventory to pledge as collateral.

For investors, this presents an opportunity to earn secured, short-term returns backed by real-world transactions.

At Financely, we help businesses structure trade finance solutions that work for both traders and investors. If you’re looking for capital to scale your transactions or seeking opportunities to invest in structured trade finance notes, get in touch with us.