Invoice Funding

Last Wednesday afternoon, in the lofty recesses of Experian’s rather dazzling Cardinal Place offices, an illuminating roundtable discussion all about the trade finance sector took place.

As discussed in a recent column on AltFi, trade finance providers have up to now sat somewhat on the periphery of AltFi’s core area of interest. The main reason for this is that none of them currently feature a dynamic online exchange. In other words, you cannot gain access to real-time investment opportunities via a trade finance company (yet). But these are a group of companies that are delivering a much-needed service to SME importers and exporters all over the world, and they are also getting heaps of institutional attention. Here’s my round up of Tonic Capital’s “UK Funders & Alternative Lenders” event.

Experian’s Gareth Rumsey was the fist to take the stage. As you might expect, Gareth’s presentation was very data-heavy, pr oviding a macro view of the financial world within which SMEs are forced to operate. One of the key points was that the banks have become ill suited to servicing the vast majority of businesses – 90% of which have fewer than 10 employees on the books. Many of these SMEs have little to no assets, which is of course one of the main reasons that the banks cannot work with them.

Tying up the talk with trade finance, Gareth revealed that the smallest businesses simply aren’t importing. Of those with 10-500 employees – roughly 1 in 4 are importing. He also touched on a massive downturn in overdraft facilities for sub £10m market cap companies. Finally we learnt that the average delay in paying invoices is approximately 20-25 days across the global economy, and that the larger businesses are typically the slowest to pay.

Next up was Alex Hambrook from Tonic Capital Group – who organized the roundtable. Tonic is a boutique consultancy firm specializing in the trade finance space. Alex first elucidated four “pain points” that currently plague alternative finance providers:

1. Supply and demand: The larger platforms’ volumes in particular are generally constrained by a lack of borrower demand. They tend to have an excess of capital to put to work.

2. Credit: How do the platforms balance rapid growth with quality credit processes?

3. De-risking: Some of the more specialized platforms – particularly those operating in the property lending space – are keen to de-risk.

4. Repeat business: The invoice finance platforms aren’t necessarily getting as many returning customers as they might.

So, problems for SMEs and problems for platforms – but what’s the solution? Trade finance, of course!

Tonic Capital can assist platforms in the implementation and execution of a specific type of trade finance facility. The model is – put simply – to extend funds to a supplier on a non-recourse basis on behalf of the buyer, allowing the goods to be shipped. Liquidity to the supplier, working capital to the buyer. In exchange the platform takes on the invoice, receiving full value from the buyer up to 120 days later. The platform can either be built on a bespoke basis or purchased off the shelf. Alex indicated that the product is best suited to the c.60,000 mid-market businesses in the UK that are turning over between £5 million and £30 million per annum. Alex’s watchwords? Simple, scalable, protectable, but not secure. The main risk involved in such transactions is that of fraud between the supplier and buyer.

Crimson’s Nathan Smith presented on the technology side of the equation. Nathan explained that technology can be a key factor in lead generation and indeed in supporting users up to the point of a trade. The customer acquisition element could be crucial, particularly given that trade finance providers hold an especially low profile even within the broader alternative finance space – which itself suffers from a dearth of public awareness.

We then moved onto the interactive round table discussion. The star of the show was undoubtedly the one end user amongst us – Paul Mitchell. Paul is the Managing Director of a business called Evacusafe UK – which produces evacuation chairs. The product itself is manufactured in Taiwan, and Paul has suffered a good deal of grief over transporting that product back to UK shores. Paul offered a number of fascinating insights:

1. Paul hadn’t heard of any of the trade finance providers that were dotted around the table, and was wholly unfamiliar with alternative finance in general. The onus, he said, is on the platforms to do a better job of reaching out to businesses like his.

2. For Paul, a personal touch is an important part of doing business with a finance provider. He likes to be able to meet and converse with a representative from whichever company is going to be funding his business. When Perry Burns of Working Capital Partners made the point that there’s a direct relationship between that kind of one-on-one attention and the cost of finance, Mr. Mitchell indicated that he is in fact more than happy to pay for quality customer service.

3. This next point was for me the single most intriguing takeaway from the event. Paul experiences something of a cyclical dry spell in sales in August every year – for the simple reason that he gets a lot of business from schools and they’re all closed in August for the Summer holidays. Traditional, data-centric finance providers are consistently reticent to fund Paul in the month of August – because it doesn’t make sense from a purely numerical perspective. If, however, Paul could find an alternative provider with a more human approach, capable of understanding that the recurring August blip is nothing to worry about, he’d then go to that provider for the full range of his funding needs. In other words, Paul would prefer a one-stop-shop – capable of offering him multiple and flexible product types – than to deal with a number of different specialist providers.

All in all it was a fantastic event. In my opinion, it won’t be long before an online exchange for trade finance arrives – offering access to real-time investment opportunities. The question is whether it comes in the form of a new product offering from an existing alternative finance provider, or from a currently offline trade finance provider seeking to gain access to a broader base of investors.

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