Buy Side and Sell Side Alternative Business Finance Techniques

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Alternative Finance vendors can manufacture assets that can (potentially?) be sold to third parties.  I tend to look at this space as both buyer-focused and seller-focused techniques.  The graph below lays it out along with example vendors.

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As to what some of these techniques mean, like the previous post indicates, you can define generalities but details and contracts matter.

Reverse Factoring or what is known as Supply Chain Finance – These are receivables that are purchase in a Single Entity where the Obligor (typically an investment or near investment grade company) of the receivable waives rights of set off (no payment delay or payment reduction allowed).

Unsecured Payable Finance - Unsecured working capital involves no receivables purchased or liens secured, which reduces paperwork with the supplier but increase risk for the funding provider

Dynamic Discounting - Early Pay of Buyer’s Payable Obligation that has been approved by Buyer.  The practice of offering discounts for early payment (eg. 2%, net 10) goes back decades.  For most large companies, there is nothing like standard payment terms.  Their payment terms proliferate across divisions, regions, and with time, to the point it is rare if a large company has less than 40 to 50 different terms. The simple practice of early payment terms has evolved into Dynamic Discount Management (“DDM”).  Dynamic Discounting is different than the static practice of one size fits all (eg. 1%, 10 day) discounts in several ways. Dynamic discounts differ from traditional discounts as the discount is calculated as a function of the time of payment, in other words, it is based on a sliding scale.  This allows the buyer to set terms based on internal hurdle rates, supplier groupings, and other factors.   To date the vast majority of early payment has been self-funded by companies own cash.

Early Pay Supplier Finance – this is really Invoice finance where a business can  draw money against its sales invoices before its’ customer has actually paid. Tungsten is really an adhoc form of invoice finance.

Seller Auctions - Receivables Purchase in an auction where the receivable is purchased on an advance rate basis with escrow of certain proceeds pending final payment from Buyer.

Marketplace Lenders - Online marketplace lending model which has established partnerships with banks over the last few years whereby banks can buy loans from the marketplace or use the marketplace to offer co-branded loans.

Factoring - Does not require a buyer approved invoice unlike many of the other models that offer early pay, dynamic discounting, or reverse auction solutions but has fraud, dilution and buyer non payment risks.

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Please contact me at dgustin at tradefinancingmatters.com with anything you would like to share around this space.  And don't forget to follow David Gustin on Twitter @TFMatters

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