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Funding commodity trading
Trading firms buy and sell commodities with an aggregate value that far exceeds their own capital resources. They achieve this by attracting funding from financial institutions. Banks are willing to lend because their loans are secured against commodities.
How banks finance trade
Banks facilitate a trade by providing a letter of credit (LC) to the seller on the buyer's behalf. This document is a bank-backed guarantee that the seller will receive payment in full so long as certain delivery conditions are met. The seller has the assurance that should the buyer be unable to make payment on the purchase, the bank will cover the outstanding amount.
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