5 Areas Where Alternative Finance & Traditional Lending Differ

What keeps most CFOs and Treasurers up at night? Is it rising interest rates?  Or bumping up against their credit revolvers or even bank covenants?  Or possibly extended payment terms with customers who are slow to pay?  Or probably all of these.

More so than at any time, companies of all sizes have financing options arising from the banking, specialty finance, and FinTech world. Many of these options include retiring receivables early, paying suppliers early, and even extending payable terms.

When comparing alternative forms of finance versus traditional sources, there are a few key dimensions that would be helpful for treasury, finance and even procurement staff to understood.

1.     Secured versus Unsecured Lending

Traditional lending is typically secured on assets.   Lenders will use fixed assets, accounts receivable and inventory, and engage in factoring, purchase order financing, leasing, etc. to help companies secure credit. They will typically file a lien on those assets, which prevents the encumbered property from being sold, refinanced or conveyed in any manner.

For alternative finance techniques, there is no secured lending. Lending is unsecured.  This is a big advantage for companies.  Take for example dynamic discounting. Banks, if they offer such a service, will typically provide buyers access to dynamic discounting programs funded with a buyers secured working capital line.  On the other hand, FinTech companies typically offer the company access to third parties to fund their supplier base, and include rebates.

2.     Permanency of capital

Companies do not want to have a source of funding here today and gone tomorrow. Traditional lending is contract oriented, while some techniques that are part of alternative finance may be here today but not necessarily in six months or a year.  Given the recent news of Aztec Exchanges bankruptcy, this is a valid concern.

Download Trade Financing Matters new whitepaper Alternative Finance: Market Update, Treasury Considerations

3.     What receivables are eligible?

Asset‐based loans are usually written on receivables and inventory, and lenders screen the books extensively to decide which receivables are eligible for the "borrowing base.” This may leave a huge chunk of receivables ineligible, which can include long dated payment terms, foreign receivables, and concentrations.

Alternative finance does not have the same limitations, as all receivables generally are eligible for finance, although to date, most solutions have been domestic (ie, within one jurisdiction and single currency) in scope,

4.     Credit enhancement

Secured lenders may require companies to add insurance to enhance the borrowing base of receivables. This increases the cost, but also enables potential higher limits to be put in place.  Alternative finance, again being unsecured finance, does not require insurance, although various funders may use insurance to reduce risk and pass on the costs to the program.

5.     Relationships and Lending

Traditional lenders can offer an array of financing solutions that are backed by various forms of collateral and can be quite flexible in the facilities they provide – term loans, A/R facilities, inventory lines, leases, etc. With many alternative finance options, there is not someone a treasurer can call when certain cash flow timing issues arise needing special attention.

Final Thoughts

In today's credit environment, with rising interest rates, and constrained bank balance sheets, companies should look at alternative liquidity options to help manage timing issues and find innovative ways to improve cash flows while keeping interest costs low. New techniques on both the buy side and sell side are offering options for liquidity.   Much of this is being driven by connected B2B networks, which combine the power of rich, real-time information with funding sources to make an informed credit decision. These options are giving Treasurers of all sizes new alternatives for funding their receivables.

Download Trade Financing Matters new whitepaper on Alternative Finance: Market Update, Treasury Considerations

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