Structured and transactional commodity finance

From the single transaction to the facility

The instruments described so far secure payment. Commodity finance in the narrower sense finances the trader's working capital during the cycle from purchase to sale. Banks distinguish between transactional finance, in which each shipment is financed individually and repaid from its own sale proceeds, and structured finance, in which a facility is secured by a pool of assets or by future production. Between these lies the borrowing base facility, which finances a revolving pool of inventory and receivables. The Federal Council's report of 2020 described the transactional model as short-term financing tied to a specific transaction, typically by documentary credit, with the goods as security. It contrasted this with revolving credit lines granted for longer periods against periodic reporting.¹ For the bank, the attraction of transactional finance lies in the self-liquidating character of the credit: the goods are sold, the buyer pays and the bank is repaid. That attraction depends on the bank's control over the goods, the documents and the flow of money. The 2020 frauds showed what happens when that control is lost.

A typical transactional facility for a Lugano steel trader works as follows. The bank grants an uncommitted line of, say, USD 30 million for the financing of identified purchases and sales. For each transaction the trader submits the purchase and sale contracts, and the bank approves the buyer and the supplier. The bank opens a documentary credit in favour of the supplier or pays against documents. It takes the bills of lading and a pledge over the goods, and requires the buyer to pay into a collection account. The bank finances most of the purchase price, while the trader finances the rest from its own funds. The bank also requires price hedging through futures or swaps where a market exists, so that a fall in price during the voyage does not erode the security. When the buyer pays, the bank deducts its advance, interest and fees and releases the margin to the trader. The facility is uncommitted, which means that the bank may refuse any new transaction without giving reasons. This flexibility for the bank is a weakness for the trader, who cannot count on financing until it has been approved deal by deal.²

Borrowing base facilities

The borrowing base facility is the standard instrument for medium-sized traders that hold inventory and sell on credit terms. The bank, often in a club or syndicate, grants a committed revolving facility whose available amount at any time is calculated from the value of eligible assets. These assets include inventory in approved warehouses or in transit, receivables from approved buyers, and sometimes cash and hedging gains. Each class of asset is valued at market, reduced by a haircut that reflects its liquidity and risk, and limited by concentration caps for single buyers, countries or warehouses. The trader reports the borrowing base weekly or even daily, and an independent auditor or collateral manager verifies it periodically. All assets in the base are charged to the banks, usually through a security agent. Swiss law requires a separate step for each type of asset: an assignment of receivables, a pledge of goods or documents and a pledge of accounts.³

The borrowing base combines the advantages of a committed line with the security of a transactional facility, but it is only as good as the information on which it rests. A trader that inflates its inventory, reports receivables from fictitious sales or pledges the same goods to several banks can draw far more than its assets justify. In the 2020 cases the banks discovered that receivables in the borrowing base did not exist, that stocks reported as held in tanks had been sold or pledged elsewhere, or that losses had been hidden in the books for years. The industry guidance adopted in Switzerland after these cases therefore recommends that borrowing base facilities be limited to larger clients. It also asks banks financing inventory at the same location to use the same inspection company, so that double pledges become visible.⁴ For a Lugano trader this means that a borrowing base facility is available only once it has reached a size and quality of reporting that many local firms do not attain.

Notes

1. Federal Council, report of 26 February 2020 (above), 5. ↩
2. UBS, "Commodity trading companies" (above) ("Uncommitted transactional credit" as the first element of its offering; "structured short-term lending" for metals, energy, soft commodities and fertilizers); Federal Council, report of 26 February 2020 (above), 5 (transactional model). The facility described in the text is an illustration built on these elements. ↩
3. On the assignment of claims see CO, Art. 164 para. 1 and Art. 165 para. 1, https://www.droit-bilingue.ch/en-de/2/22/220-164-177.html. ZGB, Arts. 884 ff. and 899 ff. (pledges of movables and of claims), and the borrowing base mechanics described in the text. ↩
4. GTR, 3 November 2021 (above) (borrowing base facilities to be limited to larger clients; banks financing inventory at the same location to use identical inspection companies; periodic third-party inspections of warehoused goods). ↩

For general information only. This article does not constitute legal or tax advice, does not replace advice on an individual case and creates no lawyer-client relationship. It reflects the legal position as of October 2026.