The receivables finance industry continues to expand and develop, with lending taking various forms and the use of technology platforms an integral part.
A lender could advance money against accounts receivable (A/R), or it could be a buyer-led programme such as channel finance or payables finance which often involves an unsecured format. Other forms include a purchase of receivables at a discount where the supplier is paying the finance cost; alternatively it may be the buyer who pays the cost of the finance through fees for extending the payment term. Each of these possibilities offer several variations, which are used and developed to meet real life needs. Investors have to consider and understand the different permutations when deciding whether and how much to invest.
Many working in receivables finance regard the current business environment as an exciting one for the industry. Receivables financing now has an increased profile among institutional investors, who recognise the potential of alternative forms of finance to provide interesting rates of returns.
The recently-held third annual ‘Receivables Finance and Alternative Capital Seminar’, jointly hosted by law firm Reed Smith and BCR Publishing was attended by many new and innovative organisations; both users and offers of receivables finance. (see below for some of the market players). The basic principle is fairly simple, involving a three-way transaction between funder, debtor/buyer and creditor/supplier. Building on that framework the permutations and deliverables are many, but in any deal the six key elements are the return; control of the entity; how risk is mitigated; relevant regulation; tax implications and the expected return.
As in many other industries, receivable finance is beginning to feel the disruptive power of digital technology. The seminar heard from Dhruv Menon, director of fintech Aztec Exchange, which aims to offer invoice discounting across the globe to supply chains, e-invoicing networks and suppliers. The biggest problem for invoice discounters is finding a home for the money raised; how do you find the sales invoices to discounting? Aztec has tied up with e-invoicing companies; e-invoicing is the only standard way that large corporates will accept purchase invoices and e-invoicing systems work with the major enterprise resource planning (ERP) players.
E-invoicing develops relationships with suppliers and customers and has large amounts of data, which can be used in an invoice discounting relationship. E-invoicing is slowly winning a stronger foothold: for instance, in 2015 it became mandatory in Spain for public sector entities. Furthermore, e-invoicing should help to reduce the risk of fraud and error.
Asked at the seminar about the challenges facing the industry, several players responded that while the model is proven, it can still – within the whole finance universe – be relatively unknown. The profile needs to be raised. For instance, bringing supply chain finance (SCF) products to a fixed income investor base requires patience in building education and understanding. But broadening the reach of these products into the financial markets is important. As the banks continue to withdraw from overdraft and unsecured lending, it seems likely that more enterprises will look to ARs to create finance. Traditional instruments such as letters of credit (L/Cs) are unpopular both with banks (as they use up balance sheet) and with customers (as they use up credit lines).
The need for education remains if attitudes are to change and invoice discounting is no longer regarded as the choice of last resort. While technology offers opportunities, it can also be seen as a barrier to entry; for instance, invoice discounters wanting to tie up with e-invoicers can take time in bringing the systems together and completing testing. Alternative receivable finance companies have to be able to perform and execution is vital.
Technology and data has to be used effectively to underwrite and monitor the credit, which requires investment. On the funding side the industry needs to clearly set out key characteristics, such as the short duration of the assets generated and the reliance on the technology platform to deliver. However, once explained these can become attractive to traditional, institutional funds. The industry is attempting something new, so recognition is still a problem.
If receivables finance – both its traditional factors and the new digital platforms – is set to replace long-established forms of lending the industry may want to look to governments for help and encouragement. It has to be remembered that the financing is usually made available to small and growing companies and those involved in export work; often in developing parts of the world. So there is financial risk- these firms are generally highly leveraged – and there is both business risk and risk in the supply chain. The unexpected can happen.
For instance, when interest rates eventually move up from their current historic lows it will present a new experience to cope with for many firms using receivables finance. The industry needs to continue to lobby and negotiate with the government over how small business and exporters are financed and supported; especially as larger mainstream banks are retreating to service larger corporates. While the AR industry can see the need and the logic for government support, politicians and civil servants seem slow to react. However, there are sometimes encouraging signs.
For instance, UK regulator the Financial Conduct Authority (FCA) runs Project Innovate, which has received 400 requests for support and offered direct support to over 200 firms. The FCA set up the innovation hub to help businesses with innovative ideas navigate financial regulation, support them through the authorisation process and engage with the regulator. In March 2016 the FCA and the Australian Securities and Investments Commission (ASIC) struck a deal, agreeing to refer to one another innovative businesses seeking to enter the other’s market. Such moves have to be seen as encouraging.
In current circumstances an instrument that can yield 5% but can still be senior and secured against an asset is an attractive proposition. However, the prevailing climate of uncertainty means there is also a reluctance to step out and make an investment that may seem a little far from the mainstream.
Movers and Shakers:
Those attending the seminar heard from several players in the market including:
ArchOver offers fixed term borrowing secured and insured against the accounts receivable of the borrower. Work in progress and purchase orders can also be used as security. The ARs are credit insured through Coface for the benefit of the lender. ArchOver is backed by crowdfunding, institutions, family offices and individuals.
With 1.4bn people in the world without electricity BBOXX provides a supply through solar panels and kits to homes and small businesses, with the cost for the customer often just replacing what they spent on diesel or kerosene. It is using receivables finance to grow its business. As part of its capital structure, the company is issuing debt issued in US dollars (USD) on a drawdown against a borrowing base, made up in part from securitised receivables.
BillFront provides fast growing digital media businesses instant liquidity by advancing payments for the outstanding invoices. The company says it has built a tailor-made solution, lean business model for profitability at scale relying heavily on technology for real-time monitoring of sales to evaluate debt capacity, modelling cash flow to reduce default risk and debtor monitoring for portfolio management.
EFS is focussed on the government sector, having recently launched a pilot providing receivables finance to suppliers to the Scottish government which offers institutional funders access to government-grade short duration receivables at scale.
MarketInvoice provides an online platform where mid-sized corporates can use their invoices to fund finance from buyers without use a middle man and invoices worth £700m have been traded on the platform to date: 80% of the corporates have never used invoice finance before; the average investor has £200k on the platform; the investor yield is 6% net with loss rates of 0.22% of funds advanced, which MarketInvoice says is an industry-leading loss rate.
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