For many global trading businesses, funding the gap between paying the supplier and receiving payment from the customer continues to frustrate.
Whilst new products have entered the marketplace, the continuing frustration from borrowers relates to the lack of a mid market product, the ability to fund multi-million Pound/Dollar contracts as well as a constantly restrictive approval criteria from current funders, that more often than not results in a decline.
That is until now. 2016 heralds the emergence of a new type of global supply chain finance, which we will cover shortly. In order to understand the benefits of this new style of funding, we need to look back over the problems the current marketplace options present.
Why do the current market options fail?
When a business looking to fund the gap goes searching in today’s marketplace, they typically discover two facts. The first is there are 4 separate groups who can help fund the gaps. The second is that for most businesses, none of these entities are able to offer a fully workable solution.
Let’s look at the 4 groups (banks, trade finance houses, invoice finance houses & funds) in turn to consider where the various difficulties lie:
Essentially, banks struggle to approve most cases, and if they do, don’t provide all of what is needed. Trade finance facilities still exist but on a very restrictive basis. They need a strong balance sheet, an established business, and for you to pass a multitude of criteria that most eventually fail after a number of weeks or months. The criteria one fails on might include problematic geography, concentration risk, the inability to offer a cohesive facility against a mix containing both letters of credit and open account transactions, a dislike of the suppliers, the margin, and the risk of not completing the sale. Certain sectors are also disliked and un-fundable, even if a deal is secure.
Trade Finance Houses
For smaller deals, these groups serve a useful stop gap, but the main issues here for larger financing deals are cost and control. These entities have become more popular since the 2008 recession. They are able to approve an increased number of applications, and can fund up to 100% of the cost of purchase. However, they come with a heavy level of control, an expensive interest rate, and short-term funding periods with potentially serious default interest. Driven by margin and the ability to sell the goods in a default situation, these firms require the borrower to be based locally, and struggle to package global export requirements. Certain sectors are un-fundable, and by controlling the trade exclusively, the borrower is unable to build up any credit history because the transactions are in the name of the funder, not theirs.
Invoice Finance Houses
The main issue here is inability to fund the whole funding gap, and an opaque set of costs. These groups offer a bank style base rate that can look very cheap, but is often made up of a number of extra fees covered under service charges that increases the actual cost of finance considerably. They will not fund supplier payments however, and therefore do not cover the whole gap. They rely on your business being able to fund those payments, and if you can’t, they cannot fund at an early enough stage in the cycle.
The issue here is extreme control and cost to your business. These groups are particularly difficult to raise funding from, can end up with a large share of your business (not only the trade), and can be expensive.
So for many prospective borrowers researching the market, there is not only a wide gap in available rate, but also a restrictive downside to all options when considering a) the whole cycle of the funding gap, b) control, and c) each business’ varying factors (e.g. Geography, payment mechanisms, concentration risk, etc).
So does an alternative exist?
2016 sees the beginning of an emerging flexibility, and the emergence of hybrid facilities due to the assembling of global funds.
The key areas of change are:
A Mid-Market Rate
These new all-in-one facilities are as close as we have today to an old style bank overdraft, whilst providing a much missed mid-market rate without the requirement of a strong balance sheet.
A loosening of criteria
A view is being taken on usually restrictive criteria such as too much concentration risk, the margin, the balance sheet and differing payment mechanisms in the same transaction (i.e. Letters of Credit on one side vs. Open Account on the other).
The Return of Term Loans
Crucially, these facilities are taking the form of much needed Term Loans on a revolving credit basis, in a similar way that a High Street would, or should, be doing. This type of facility does not require total control of the trade in a way a trade finance house does. In fact, these facilities can even act as a top up to an approved High Street Bank facility, where the facility is agreed but is not enough to complete on the entire transaction.
Approvals for Hard-to-Fund Sectors
Interestingly, there is a creative approach when it comes to certain, usually un-fundable sectors. Whilst not impossible, it is usually very difficult to fund the purchase of raw materials. Commodities with very low margins are often fundable.
There are some exciting moves in this global marketplace right now. Whilst this is UK based funding it is great news for a good number of businesses trading internationally, and not just in the UK, as global businesses can qualify.
If you would like to learn more about how these facilities might help your business, please click here for a free 15 minute free consultation.
About Chris Davidson
Chris Davidson is Managing Director of Discover & Invest Ltd.
He believes passionately in providing businesses with market-leading financial insights that have a positive impact on the bottom line. As a result, Chris helps get the best rates and terms available at any one time.
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