In a recent survey of Stak’s top twenty-five (25) channel partners, we uncovered the pitfalls, frustrations, and tactics used when sourcing trade financing.
When asked what frustrates them most about the specialist commercial finance market right now, over half (57%) of those surveyed named lenders changing their mind after issuing offers as their greatest disappointment.
A quarter of respondents (24%) identified a disconnect from what was advertised to the final offer, a mismatch to the requirement.
Rates not being good enough was an issue for 14% of those surveyed, while only 5% of those surveyed cited lack of choice as their biggest setback.
Trade finance is a specialised area of commercial finance. A client’s supply chain can often become complex and pinpointing exactly where funds are needed along the buy/sell cycle often takes an investment of time with the client.
1. The disconnect with non-bank trade financing
Outside of banks, trade finance is often advertised by invoice factoring providers as a complementary product. Approvals are often based on a credit assessment on the client’s trading performance and floating assets such as receivables, equipment or the Directors personal assets.
Approvals on trade financing from invoice factoring providers are based on correlations between the receivables exposure and limit provided to advance payments to suppliers. The exposure on the trade finance position will often never exceed 100% of the eligible outstanding receivables balance.
Some invoice factoring providers utilise an insurance product to provide approvals where current assets in the business don’t fit the limit required. The frustration faced by most introducers is achieving insurance approvals high enough to fit the client’s ongoing requirements.
Economic factors can shift trade credit insurer risk exposures globally, resulting in policy reductions, ultimately ending in a clients credit limit being slashed by lenders without warning.
If a lenders portfolio is built on the back of insurance underwriting there’s an inherent risk of the underwriter changing direction resulting in the potentially catastrophic impact to the lender’s operation.
Invoice Factoring providers are highly effective at providing funding against receivables. Trade finance requires specialised teams that work within the supply chain. International trade jurisdictions carry complexities that can place enormous administration pressures on lenders not positioned to work hand-in-hand with the client’s operation.
2. Mismatched products to trading cycles
Bank trade facilities are often structured to fit the clients trading cycle up to 180-days. Non-bank providers offering trade financing have essentially created a hybrid model that maintains a requirement for repayments along with the trading cycle.
Repayments along the cycle place additional stress on a clients cash flow. Funds advanced to suppliers, repaid upon receipt from the end customer sale is referred to as “self-liquidating” transactions. This removes the need for a client to rob vital cash from the business to repay funds to credit facilities before inventory is converted to a sale.
While a facility that requires fixed payments ultimately provides “the result” to get suppliers paid, it can also cause significant fractures to cash flow that cannot be seen today.
We like to refer to it as the iceberg effect. When a client is sourcing funding to pay suppliers, it’s safe to assume they are strapped for cash. They know repayments are required, but unaware of the unpredictable impact it can have further down the line.
Lending the client funds to pay a supplier and immediately requiring them to repay these funds before new revenue is generated gradually erodes operational cash flow that can be difficult to identify up front. The result is another cash flow gap caused by the new funding. Just like the iceberg you knew might be there but didn’t see coming.
3. Credit limits not large enough for sales or future growth
Lenders are often successful in providing approvals for clients that have a smaller requirement relative to their existing assets or insurance approval.
If a client pledges additional assets this can also result in a higher limit provided.
Brokers presenting clients often hit roadblocks under the following conditions:
– Client lacks trading history with strong sales growth
– Funding size proportionally larger than trading history can support
– Confusing invoice factoring with funding pre-invoice to suppliers
– The client has a poor credit history, profitability or ATO DEBT
– Client lacks available equity in real estate assets to support limit
– Client is primarily selling to international buyers
For finance brokers sourcing capital for clients, trade finance options can add an unwelcomed complexity that when solved, results in exceptional feedback from clients.
Careful consideration to find the best fit is critical to maintaining positive feedback from commercial clients to reinforce long-term relationships.
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Stak primarily makes funding decisions based on the strength of a client’s opportunities locally or overseas. Strong orders, contracts, and customers form the base of our approvals.
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We regularly share our thoughts on trade finance, lending, company culture, product strategy and design.
Stak works with clients that sell to some of the largest buyers in Australia & overseas.