Collateral management: what lenders should expect

Commodity-backed lending allows producers, processors and traders to unlock finance using stock in a warehouse. For the lender, the key question is simple: is the collateral really there, in the right quantity and condition, and under control?

The role of the collateral manager

A collateral manager is a neutral third party appointed to monitor and control pledged goods on behalf of the lender. The arrangement is usually set out in a Collateral Warehousing Agreement (CWA) between the lender, the borrower and the collateral manager.

What lenders should expect

• Physical verification of stock on entry, during storage and on release
• Releases of goods only in line with the lender's instructions
• Regular inventory reconciliation and stock reports
• Warehouse inspections covering storage conditions and security
• Early warning of risks such as quality deterioration or shortfalls
• Verification of the loan covenants that relate to the collateral

Why it matters

Good collateral management reduces the lender's exposure and gives the borrower access to finance on better terms. Clear, timely reporting builds the trust that keeps the credit line open.