Executive Briefings

Post-Recession, Mid-Sized Suppliers Seek New Avenues of Trade Financing

Global businesses are still experiencing the aftereffects of the Great Recession of 2007-2009. But perhaps no sector has felt the pain more acutely than mid-market suppliers.

Post-Recession, Mid-Sized Suppliers Seek New Avenues of Trade Financing

These less-than-gigantic entities have always had a tenuous relationship with more powerful original equipment manufacturers (OEMs) and mega-retailers. Rarely are they the ones within global supply chains to call the shots. It’s no surprise that they often struggle with financial stability.

Their plight grew worse, of course, during the recession, when access to working capital shrank drastically, and thousands of suppliers simply went out of business. Companies large and small suffered when banks curtailed lending, and credit dried up.

It’s not as though banks were ever their salvation. “Banks have never offered supply-chain finance to their middle-market customers,” says Rob Barnes, founder and managing director of PrimeRevenue, Inc. Ironically, the situation has been made even direr by global banking reforms contained in the Third Basel Accord, or Basel III. The voluntary framework, to be implemented over the next three years, sets out stricter guidelines for capital levels, stress testing and liquidity requirements.

One of its unintended consequences, especially in Europe, has been to raise the cost of funding, says Neil Ross, regional manager for EMEA trade credit with AIG Europe. Banks have responded by narrowing their scope to borrowers with the highest degree of stability, and the least amount of risk. Bottom line: it has become tougher than ever for the mid-market to access supply-chain financing.

The obvious solution lies in alternative sources of finance. If the banks won’t play with the mid-market, someone else needs to pick up the slack. That dovetails perfectly with the post-recession attitude of many companies, which are looking to diversify their funding sources. The economic crisis, says Ross, taught them a big lesson: “only having one or two funders is leaving themselves vulnerable.”

PrimeRevenue is among those entities seeking to take advantage of the funding void left by traditional banks. Last year, it introduced PrimeRevenue Capital Management, which it touts as the first provider of access to working capital finance by mid-market and sub-investment grade companies. PrimeRevenue is working with a broad range of non-bank entities, such as insurance companies, pension funds, hedge funds and capital market investors.

Barnes says PrimeRevenue bypasses the traditional bank letter of credit in favor of open account financing, whereby goods are delivered before payment is due. It purchases the invoice from the supplier, removing from the buyer the burden of funding the terms of sale. In the process, the supplier gets access to cash more quickly, and the buyer acquires more negotiating flexibility, in what Barnes terms “a win-win situation.” (PrimeRevenue doesn’t offer invoice discounting, another popular method of speeding up payment.)

AIG, a multinational insurance company, is one of those non-bank entities to become involved in supply-chain financing. It offers protection in cases where credit risk is heightened because of the presence of unrated or sub-investment grade buyers. In partnership with PrimeRevenue, AIG’s services have become “a very attractive funding opportunity for a wide range of capital market funders,” says Ross.

Until recently, trade financing was almost exclusively the domain of large banks, says Barnes. But regulatory changes and economic trends have combined to create a need for alternative forms of investment, along with the expertise to aid in the management of day-to-day transactions.

Ross views modern-day supply-chain financing as “a team effort” that can involve multiple non-traditional funding partners. Moreover, at a time when supplier stability is so essential to the maintenance of complex supply chains, it has become a necessity for global trading partners.

One might well question the stability of the non-bank newcomers. In this instance, however, suppliers are merely selling an invoice. “As long as the price is good and they get their money next day, no vetting is done,” says Barnes.

In any case, he doesn’t believe that PrimeRevenue and AIG are treading on bankers’ territory. “We’re taking advantage of regulatory changes and moving into a part where banks were reluctant to move into in the first place,” he says. “We focus on the point of credit – who’s going to pay in the end.”

Suppliers might welcome such an option as protection against the tendency of powerful buyers to stretch out payment terms (even as they demand accelerated payment from their own customers). The trend forces each tier of the supply chain to apply more pressure on its upstream supplier, placing more stress on the whole network.

It will be interesting to see how fledgling players like PrimeRevenue Capital Management fare when rock-bottom interest rates begin to rise. “Right now, it’s a cheaper environment to fund trade,” Barnes acknowledges. “As rates go up, the need for working capital and alternative resources will increase. There’s not a scenario we can think of where companies don’t need to diversify capital and funding.”

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These less-than-gigantic entities have always had a tenuous relationship with more powerful original equipment manufacturers (OEMs) and mega-retailers. Rarely are they the ones within global supply chains to call the shots. It’s no surprise that they often struggle with financial stability.

Their plight grew worse, of course, during the recession, when access to working capital shrank drastically, and thousands of suppliers simply went out of business. Companies large and small suffered when banks curtailed lending, and credit dried up.

It’s not as though banks were ever their salvation. “Banks have never offered supply-chain finance to their middle-market customers,” says Rob Barnes, founder and managing director of PrimeRevenue, Inc. Ironically, the situation has been made even direr by global banking reforms contained in the Third Basel Accord, or Basel III. The voluntary framework, to be implemented over the next three years, sets out stricter guidelines for capital levels, stress testing and liquidity requirements.

One of its unintended consequences, especially in Europe, has been to raise the cost of funding, says Neil Ross, regional manager for EMEA trade credit with AIG Europe. Banks have responded by narrowing their scope to borrowers with the highest degree of stability, and the least amount of risk. Bottom line: it has become tougher than ever for the mid-market to access supply-chain financing.

The obvious solution lies in alternative sources of finance. If the banks won’t play with the mid-market, someone else needs to pick up the slack. That dovetails perfectly with the post-recession attitude of many companies, which are looking to diversify their funding sources. The economic crisis, says Ross, taught them a big lesson: “only having one or two funders is leaving themselves vulnerable.”

PrimeRevenue is among those entities seeking to take advantage of the funding void left by traditional banks. Last year, it introduced PrimeRevenue Capital Management, which it touts as the first provider of access to working capital finance by mid-market and sub-investment grade companies. PrimeRevenue is working with a broad range of non-bank entities, such as insurance companies, pension funds, hedge funds and capital market investors.

Barnes says PrimeRevenue bypasses the traditional bank letter of credit in favor of open account financing, whereby goods are delivered before payment is due. It purchases the invoice from the supplier, removing from the buyer the burden of funding the terms of sale. In the process, the supplier gets access to cash more quickly, and the buyer acquires more negotiating flexibility, in what Barnes terms “a win-win situation.” (PrimeRevenue doesn’t offer invoice discounting, another popular method of speeding up payment.)

AIG, a multinational insurance company, is one of those non-bank entities to become involved in supply-chain financing. It offers protection in cases where credit risk is heightened because of the presence of unrated or sub-investment grade buyers. In partnership with PrimeRevenue, AIG’s services have become “a very attractive funding opportunity for a wide range of capital market funders,” says Ross.

Until recently, trade financing was almost exclusively the domain of large banks, says Barnes. But regulatory changes and economic trends have combined to create a need for alternative forms of investment, along with the expertise to aid in the management of day-to-day transactions.

Ross views modern-day supply-chain financing as “a team effort” that can involve multiple non-traditional funding partners. Moreover, at a time when supplier stability is so essential to the maintenance of complex supply chains, it has become a necessity for global trading partners.

One might well question the stability of the non-bank newcomers. In this instance, however, suppliers are merely selling an invoice. “As long as the price is good and they get their money next day, no vetting is done,” says Barnes.

In any case, he doesn’t believe that PrimeRevenue and AIG are treading on bankers’ territory. “We’re taking advantage of regulatory changes and moving into a part where banks were reluctant to move into in the first place,” he says. “We focus on the point of credit – who’s going to pay in the end.”

Suppliers might welcome such an option as protection against the tendency of powerful buyers to stretch out payment terms (even as they demand accelerated payment from their own customers). The trend forces each tier of the supply chain to apply more pressure on its upstream supplier, placing more stress on the whole network.

It will be interesting to see how fledgling players like PrimeRevenue Capital Management fare when rock-bottom interest rates begin to rise. “Right now, it’s a cheaper environment to fund trade,” Barnes acknowledges. “As rates go up, the need for working capital and alternative resources will increase. There’s not a scenario we can think of where companies don’t need to diversify capital and funding.”

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Post-Recession, Mid-Sized Suppliers Seek New Avenues of Trade Financing