THE NEW BREED OF SUPPLY CHAIN FINANCE

By Chris Davidson

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.

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:

Banks

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.

Funds

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).