Non-traditional lending has the potential to be very lucrative and profitable—provided lenders can overcome the operational impediments.
In an effort to increase profitability and source new streams of revenue, financial institutions are becoming more inventive and expanding the array of acceptable collateral to secure private loans. Two prime examples of these non-traditional loans – trade financing and structured lending. Each approach can be highly lucrative, but present significant operational challenges, particularly in the tracking and management of nontraditional forms of collateral. As firms attempt to keep up with what the competition deems satisfactory in terms of collateral, the technology for managing collateral has not. In this latest whitepaper, Valuing Collateral and Managing Risk in Structured Lending: A Systematic Approach, we dig into the operational challenges impacting structured lending and trade financing firms.
What is structured lending?
Structured lending refers to loans made to private clients with terms highly tailored to the borrower’s circumstances. Dollar amounts are typically in the tens or even hundreds of millions. Often these loans have a business purpose—for instance, an entrepreneur borrowing to finance new venture or acquire a stake in a private company. Structured loans are also used to finance personal purchases.
What is trade finance?
Trade finance is a form of credit whereby the lender will offer against anticipated revenues from the borrower’s future production,such as, agriculture commodities or oil and gas. In many circumstances, the borrower is unable to secure a loan from a mainstream bank, but a specialized trade finance firm will take on the risk. They do this in part by:
- Accepting, for example, the future production of crude oil as a form of collateral
- Using the revenue tied to its production as collateral, the borrowing firm can use the loan to invest back into their business
- Having a line of credit from a larger bank that it can use to finance these loans, effectively playing the role of an intermediary
Trade finance firms may also hedge in the futures market to protect themselves against a production revenue shortfall or price drop in the commodity that is financed.
From blue-chip stocks to fine art: managing a diversity of collateral types
Data on the size and growth of the structured lending and trade financing market is hard to come by, in part because of the private nature of such deals, but also because of a lack of industry standardization. The wide variety of non-traditional collateral types that banks and trade financing firms are accepting to secure loans creates a myriad of operational challenges for these institutions. These firms require flexible technology solutions that replace spreadsheets, eliminates the siloed approach, and enables consolidated reporting of a lender’s entire non-traditional loan portfolio, LTV ratios, and risks.