Prepayment finance—structure, parties and risks
Produced in partnership with Dentons UK and Middle East LLP
Prepayment finance—structure, parties and risks

The following Banking & Finance guidance note Produced in partnership with Dentons UK and Middle East LLP provides comprehensive and up to date legal information covering:

  • Prepayment finance—structure, parties and risks
  • What is prepayment finance?
  • Typical prepayment finance transaction structure
  • Key parties to a prepayment finance transaction
  • Contractual structure of the financing arrangements
  • Risk apportionment between the lender and the offtaker
  • Insurance of the prepayment contract
  • Security

What is prepayment finance?

Buyers frequently provide finance facilities to commodity producers by way of paying in advance for goods and commodities.

Prepayment finance (a type of commodities finance) is an established structure used to provide finance directly to buyers or traders of goods and commodities and indirectly to producers/exporters of goods and commodities. These arrangements are useful to:

  1. the producers because it means that they can access credit which would not be available to them through the banking system, and

  2. the buyers because it allows them to negotiate long term supply contracts with producers in exchange for the provision of finance

They are particularly useful where the producer is based in a country which has exchange control regulations or a taxation regime which prohibits or penalises direct lending to producers by overseas financial institutions. Such regimes often permit advance payments to the producers for the purchase of goods.

A typical prepayment finance facility will have a tenor of between one and five years, although it is also common for facilities to be extended.

Prepayment finance facilities are usually secured by two security packages:

  1. one which supports the producer’s obligations to the buyer under the advance payment arrangements, and

  2. one which supports the buyer’s obligations to its lender

For more information, see Practice Notes:

  1. Prepayment finance—key facility terms, and

  2. Prepayment finance—taking security