Cross your T’s and dot your I’s

When it comes to financing commodities, one of the most common methods is also one of the most laborious - I'm talking about Letters of Credit, or LCs as they're more commonly known.

When a supplier wants guaranteed payment they will often request the buyer to use an LC. In simple terms, an LC is a bank guarantee that the supplier will be paid once certain conditions have been met. These often include presentation of documents such as certificates of analysis, certificate of origin, and importantly original bills of lading. Using an LC reduces the risk for the supplier that the buyer will actually be able to pay for the goods.

There will often be extremely precise wording required by the financing bank to appear on the bill of lading. After all, the BL is the title document for the cargo and forms part of the collateral behind the transaction.

When issuing BL instructions to the shipper or shipping line, attention to detail is paramount. The wording needs to match the LC requirements word for word, comma for comma.

To someone outside the industry this probably sounds ridiculous, but I have seen multi-million dollar payments delayed over something as minor as a grammatical error on a BL. In some cases, finance desks will have a dedicated LC specialist that reviews draft shipping documents before originals are issued. Any additional round of amendments with a shipping line can mean further delays in document presentation and ultimately payment.

Commodity trading often gets associated purely with price risk and market direction, but operational and financial precision are just as critical.

Understanding the full flow of commodities including finance, logistics, accounting, and treasury, gives you a far more complete understanding of how the industry actually functions. This is particularly important if you have front-office ambitions - if you can't finance material then you won't have anything to trade!