The role of banks in cotton export finance

Cotton as a globally traded commodity is subject to the particular financing requirements and the risk profile of cross-border transactions. Cotton exporters have to find answers to key financial questions, especially how:

• To secure funds to bridge the liquidity gap between payment for the raw cotton purchase, transport, storage, processing, etc. until payment is made by the buyer under the export contract;
• To secure payment by the buyer.
• To raise financing and structure the export process, exporters turn to domestic banks, international banks, buyers, input (seeds and fertilizers) suppliers and export support organizations. The main sources of finance and risk cover are banks; in the section that follows, the focus will thus be on the role that banks play in raising funds and mitigating risks related to cotton exports.

The exact credit structure will depend on an individual borrower’s solvency, balance sheet, internal risk control systems, general standing and track record, on the security available under the transaction and its related legal aspects. As such, smaller companies are, as a rule, likely to be subject to more stringent controls than substantial and well-known companies. The costs of bank credit facilities and other related services differ from country to country and depend mainly on the solvency of the borrower as well as the strength of the underlying transaction.