1) Letters of Credit (LCs) — Mechanics, Documentation & Use-Cases
Letters of Credit are bank-issued commitments that provide assurance to the seller that if they comply with the terms of the LC and present the required shipping documents, they will receive payment. LCs are essential tools where counterparties are new to each other, or when cross-border creditworthiness is difficult to assess.
Full step-by-step LC lifecycle
- Contract negotiation: Buyer and seller agree on price, quality, delivery terms (Incoterms), and payment via LC.
- Issuance: Buyer requests their bank to issue an LC in favor of the seller. The LC specifies documentary requirements and expiry dates.
- Advising & Confirmation: Seller's bank advises the beneficiary. If requested, Vicage (or another bank) can confirm the LC, adding its guarantee to pay in case the issuing bank fails.
- Shipment & Documentation: Seller ships goods and presents the documents (bill of lading, commercial invoice, packing list, certificate of origin, inspection certificate) within LC terms.
- Presentation & Examination: The advising/confirming bank checks documents against LC terms. If compliant, payment is made (sight or usance).
- Reimbursement: Issuing bank reimburses the paying/confirming bank, or buyer settles the promoter’s obligations per agreed terms.
LC Variants and when to use them
- Revocable vs Irrevocable: Irrevocable LCs are standard because they cannot be changed without consent of all parties.
- Confirmed LCs: Added security where the seller obtains a bank guarantee from a stronger bank.
- Sight vs Usance (Term) LCs: Sight LCs pay upon presentation; Usance LCs pay at a future date (e.g., 30–90 days).
- Transferable LCs: Useful when intermediaries need to transfer proceeds to suppliers.
Common Documentation Checklist (sample)
Commercial Invoice
Bill of Lading or Airway Bill
Packing List
Certificate of Origin
Inspection/Phytosanitary Certificates (if applicable)
Insurance Policy / Certificate (if required)
Other documentary conditions as per LC
2) Invoice & Receivables Financing — Operational Detail
Invoice financing converts receivables into immediate working capital. This is vital for exporters whose buyers may have extended payment terms. Vicage provides both recourse and non-recourse financing depending on credit profile and risk appetite.
How invoice financing works — Example
Exporter A issues $200,000 in invoices to merchants in Europe with 90-day payment terms. Vicage advances up to 85% ($170,000) upon receipt of the invoice and supporting documents. When buyers pay after 90 days, Vicage remits the remaining 15% less fees.
Structuring options
- Domestic vs Cross-border receivables: Cross-border transactions require stronger credit assessment and may need insurance or confirmation by a local bank.
- Factoring (Non-recourse): Vicage assumes the credit risk for covered invoices. Appropriate for strong receivable credit profiles when the exporter prefers to transfer buyer risk.
- Invoice discounting (Recourse): Cheaper but exporter retains liability if buyer defaults.
KYC & Document requirements
Company incorporation documents, buyer credit reports, invoices, purchase orders, proof of shipment, and evidence of delivery are typically required.
3) Pre-export & Post-import Financing
These facilities match finance timing to the commodity lifecycle: pre-export finance supports production and aggregation; post-import finance helps buyers distribute and sell imported goods before settling.
Pre-export finance mechanisms
- Collateral: Warehouse receipts, pledged commodity stock, assignment of receivables.
- Borrowing base: Advances based on a percentage of the market value of stored commodities.
- Repayment: Typically repaid from export proceeds upon shipment and sale.
Post-import value chains
Importers can use the goods themselves as working capital — for instance using inventory as collateral while they distribute and monetize the goods in local markets.
4) Structured Commodity Finance — In-depth
Structured commodity finance focuses on the economics of a specific commodity flow: production, storage, transportation, and sale. It often involves multi-party arrangements among producers, offtakers, storage providers, and financiers.
Key structures
- Warehouse Receipt Financing: Advances against physical inventories stored in approved warehouses with a documented chain of custody.
- Borrowing Base Facilities: Revolving credit where availability adjusts with the value of collateral (commodities) on hand.
- Tolling & Processing Finance: Finance to cover processing costs where raw materials are converted into finished products and sold under an offtake agreement.
- Offtake-backed Finance: Deals secured by a committed buyer (offtaker) for future production; common in energy and metals.
Legal & logistic considerations
Structured deals require clear legal frameworks: perfected security interests over goods, enforceable warehouse receipts, clear title transfer mechanics, and insurance covering agreed perils. Logistics—inspection, sampling, and chain-of-custody—are essential to determine value and mitigate disputes.
5) Risk Management & Compliance
Risk is inherent to trade. Our layered approach combines contractual protections, insurance, digital tracking and regulatory compliance to reduce financial loss and reputational risk.
Risk categories we manage
- Credit risk: Buyer default or non-payment.
- Counterparty risk: Intermediaries failing to fulfill obligations.
- Commodity price risk: Adverse price movements between shipment and sale.
- Political & transfer risk: Capital controls, sanctions, or expropriation.
- Logistical risk: Damage, diversion, or loss in transit.
Mitigation tools
- Insurance: Credit insurance, cargo insurance, political risk coverage.
- Confirmations & guarantees: Bank confirmations, standby LCs, performance bonds.
- Hedging: Price hedging via futures and options where relevant (for liquefied commodities and metals).
- On-site verification: Independent inspections, sampling and SGS/Intertek reports.
