Why Logistics Execution Determines Trade Finance Bankability

The logistics associated with the movement of goods internationally introduces time-based risk between contract execution and the closing of a cross-border transaction. Logistics is not peripheral to trade finance, it is a primary reason trade finance structures exist in the first place. Trade finance does not eliminate these risks. Its function is to mitigate and make them financeable by identifying, controlling, and assigning them to parties capable and willing to bear them.

Logistics risks include production delays, shipment failures, regulatory intervention, documentation errors, and delivery uncertainty. The risks do not arise at a single moment, they evolve over time as goods move through the transaction. For trade finance purposes, this risk can be understood through three sequential stages:

• Pre-shipment risk arises between contract execution and shipment, when goods may not yet exist or cannot be independently verified.

• In-transit risk begins once goods are shipped, when physical control is replaced by documentary control and risk centers on loss, delay, and performance of the transport chain.

• Post-shipment risk emerges at destination, where customs clearance, regulatory compliance, and final delivery determine whether the transaction can be completed and payment ultimately released

In many cases, the commercial transaction itself is sound, but the timing and execution risks introduced by logistics render it difficult or impossible to finance. Whether a transaction is bankable depends less on commercial intent than on whether these stages can be clearly documented, controlled, and aligned with financing and payment triggers.

At each stage, something can go wrong. Logistics risk is not removed, it shifts, and trade finance responds by reallocating that risk through financing structures, documentation, insurance, and guarantees. Many transactions fail not because goods cannot move, but because logistics-driven execution risk cannot be structured in a way that lenders are willing to underwrite.

Consider cobalt mined in the Democratic Republic of Congo and sold to a U.S.-based processor for refining, before being supplied to technology and battery manufacturers in the United States and international markets. Before shipment, the exporter must finance extraction, aggregation, and preparation of the material in a high-risk operating environment. During shipment, the cobalt must move through regional corridors and ports, relying on freight forwarders, carriers, and port operators whose performance directly affects execution risk, with control exercised largely through transport documents rather than physical oversight. After arrival in the United States, the shipment must clear customs, meet regulatory and traceability requirements, and be delivered on schedule to processing facilities.

1. Pre-Shipment Risk: Where Trade Finance Begins

Of the three stages, pre-shipment risk sits at the most fragile point in a trade finance transaction. From a financing perspective, this is the stage where execution risk is highest and collateral is weakest. Commercial obligations have been agreed, but goods may not yet exist in a form that can be independently verified or controlled, even as costs are already being incurred.

In the cobalt example, the exporter in the Democratic Republic of Congo must finance extraction, aggregation, initial processing, and preparation of cobalt concentrate before shipment can occur. These activities require upfront capital in a challenging operating environment characterized by regulatory uncertainty, infrastructure constraints, and limited access to unsecured credit. At this stage, there are no shipping documents, no transport confirmation, and no third-party validation that goods will be completed and exported on schedule.

For lenders, this presents a structural problem. Pre-shipment risk is difficult to finance because there is no movable asset to secure and no external milestone to verify. If the buyer delays, renegotiates, or cancels, the exporter may be left with stranded inventory or unrecoverable costs. Even where contracts are legally enforceable, cross-border remedies are slow and uncertain. For these reasons, banks are generally unwilling to finance pre-shipment risk based solely on exporter credit, particularly in emerging and frontier markets.

This creates a classic chicken-and-egg dynamic: execution is required to unlock financing, yet financing is required before execution can occur.

Trade finance intervenes by reallocating risk away from the exporter and toward parties better positioned to absorb it. One common mechanism is a letter of credit (LC) issued by the importer’s bank, which replaces reliance on the buyer’s future payment with a conditional, bank-backed commitment to pay upon presentation of specified shipment documents. In effect, the LC converts uncertain buyer performance into a verifiable payment obligation tied to logistics execution.

In the DRC cobalt transaction, an LC payable upon shipment allows the exporter to demonstrate that a credible payment trigger exists once defined milestones are met. That commitment does not finance production on its own, but it enables pre-export financing or working capital facilities by giving lenders confidence that repayment will occur once goods are shipped and documents are presented.

Payment terms also play a critical role and should be viewed as part of the trade finance structure, not merely a commercial choice. Open-account terms concentrate pre-shipment risk on the exporter and are rarely compatible with capital-intensive production in high-risk environments. Structured payment terms, supported by bank instruments or guarantees, allow risk to be shared rather than concentrated.

In some cases, additional layers are required. Export credit agencies, political risk insurers, or buyer guarantees may support production financing where private lenders are unwilling to take full exposure. The objective is not to eliminate pre-shipment risk, but to align it with balance sheets capable of carrying it.

2. In-Transit Risk: Documentary Control and Financing Release

In-transit risk begins once goods are shipped, marking the stage where physical possession is surrendered but execution risk becomes documentable and therefore more readily financeable. Goods now exist and are in motion, yet remain beyond the direct control of both exporter and importer.

In the cobalt example, once the shipment leaves the port of origin, the exporter’s exposure shifts from production risk to transport disruption. The cargo faces risks of delay, damage, loss, theft, or force majeure across multiple carriers, routes, and jurisdictions, with little or no real-time physical oversight. Control passes instead to transport documents. Chief among them is the bill of lading, which serves as receipt, contract of carriage, and, crucially, document of title enabling constructive possession.

For lenders, this creates a fundamentally different risk profile than pre-shipment. Where pre-shipment offered no verifiable asset or milestone, in-transit risk can be tied to objective evidence of shipment. Banks at this stage are able to finance proof of execution, but not the movement of goods itself.

Once compliant transport documents (e.g., bill of lading, certificate of origin, inspection reports) are issued and presented, lenders can verify that a defined logistics threshold has been met and release funds under letters of credit or enable discounting under documentary collection arrangements. At this stage, trade finance concentrates on shipment milestones to shift risk from the exporter to the bank through documentary leverage, and ultimately to the importer.

Marine cargo insurance plays a supporting but secondary role during transit. While cargo insurance mitigates financial loss from damage or loss, it does not eliminate timing risk or commercial disruption. Delays can impair downstream processing schedules, breach delivery windows, or erode value even when cargo is insured. This is particularly acute for time-sensitive or perishable goods, where transit delays can destroy economic value outright. As a result, lenders assess carrier quality, routing reliability, and documentation discipline alongside insurance coverage when determining advance rates, pricing, and willingness to finance.

In-transit risk is therefore the point at which trade finance becomes operationally active. Where logistics execution is reliable and documentary discipline is strong, banks and insurers are more willing to absorb and price risk. Where these elements are weak or opaque, financing options reduce, become conditional, or disappear altogether.

3. Post-Shipment Risk: Clearance and Payment Risk

Post-shipment risk arises once goods arrive at destination and persists through customs clearance, regulatory compliance, and final delivery. Although physical transport is largely complete, this stage often determines whether payment is released promptly or becomes delayed, disputed, or withheld.

In the cobalt example, arrival in the United States does not by itself complete the transaction. The shipment must clear customs, comply with import regulations, meet traceability and disclosure requirements, and be delivered to processing facilities on schedule. Errors in invoices, certificates of origin, transport documents, or regulatory filings can trigger inspections, delays, penalties, or seizure. Even routine compliance reviews introduce uncertainty around timing and control.

For lenders, this creates a distinct challenge. Execution risk now manifests as payment risk. Under letters of credit, issuing banks examine documents on a strict compliance basis. Minor discrepancies, even if goods are physically sound and accepted, allow banks to refuse honor or delay payment. Under documentary collections or open-account terms with deferred payment, importers gain leverage to postpone settlement by citing clearance delays, alleged non-conformities, or downstream issues. The exporter, having surrendered title and control, is left exposed.

Well-designed trade finance structures anticipate destination-side friction rather than react to it. Alignment between documentary requirements, customs responsibilities, delivery obligations, and payment triggers is essential. Where this alignment is weak, exporters bear risks they cannot control, while lenders respond by tightening terms, increasing pricing, or declining exposure altogether.

Post-shipment is thus the phase where misalignment between logistics execution and financial triggers is most costly. Strong coordination of documents, customs responsibilities, and payment conditions allows banks to absorb remaining risk confidently. Weaknesses in these elements render transactions vulnerable to disputes that turn otherwise successful deliveries into financing failures. As with earlier stages, the objective remains the same: not to eliminate logistics-driven risk, but to control and assign it to parties best equipped to bear it.