International commodity trading in Agris, Energy and Metals is a 4.5 Trillion plus annual market. Almost 100% of it requires financing during several stages in the supply chain. Ultra large commodity traders (with annual turnover in excess of $100B, ~ 15 nos) such as Cargill and Glencore have dedicated lines of credit from syndications of several large banks. Large traders (with annual turnover in excess of $10B, ~ 100 nos) such as say Olam and Noble also have revolving lines of credits with 3-4 large banks at any point of time. The loans from the banks to these large traders is secured not just by corporate guarantees but it is also structured such that the underlying commodities, assets, contracts or receivables serve as collateral, this reduces the effective interest rate to around 3 to 6% depending on the commodity involved.
It is the SME traders (with annual turnover between $50 and 500MM, ~ 20k nos) which struggle to get adequate finance. Most large banks can’t service SME traders structured finance requirements either due to commercial or due to regulatory reasons. Most banks do not have automated systems to manage their commodity finance desks, because of which they have high operational costs, preventing them to do a deal say less than £5Million in size. Banks additionally have to comply with regulations such as Basel III which hits them with higher capital adequacy ratios for smaller firms. More than 40% of structured commodity financing requests from SME traders are rejected by banks, this forces them to either get simple balance sheet based financing or reach out to alternate finance providers. Both these options cost roughly around 16% (data based on UK markets), compared to just 6% paid by large companies this creates a huge competitive disadvantage for the SMEs.
At Satoshi Systems, by digitizing the supply chain processes and automating trade finance related operations, we are able to reduce our operating costs by more than 80% compared to the costs incurred by banks and traditional trade finance firms. Additionally, by practical usage of technologies such as Blockchain, we are able to eliminate the incidents of fraud and other malpractices. Finally, through effective automation of valuation, margining, haircuts and other risk management processes, we are able to manage our default rates at half of banks (.75% vs 1.5%) and traditional trade finance firms. Essentially, by using technology we are able to offer cheaper financing to borrowers while maintaining superior returns to the investors. A win-win for both the borrowers and lenders!
We are now seeking credit lines from investors which would then be disbursed to the loan requirements of a pool of commodity traders we have already on boarded our platform. From institutional investors we are looking at a minimum of £5Million investment. This would be invested in atleast 10 different loan opportunities therefore providing the necessary diversification benefits. Each loan is typically for a period of 30 to 120 days. Our platform will give you full visibility on each loan and the repayments on it as they happen. Borrowers will pay on an average around 12% APR and the lender will receive on average 8%, as platform operator we will receive 4% of the interest income which would then be shared with other supply chain and risk management partners. You will also have access to all the loan opportunities on our platform and if you would like to have a greater exposure to a particular deal you can do so on an ad-hoc basis.