Will Alternative Finance Options Erode Middle Market Credit Facilities? Post 2

Bite-out-of-money

In today’s exciting world of Buyer-led finance, one must remember that companies do not just sell to one buyer. In fact, a company could sell to multiple buyers that have multiple early pay solutions going. Imagine trying to participate in a marketplace from C2FO, pcard programs from various bank providers, early pay discount programs from Taulia and Ariba, and seven supply chain finance programs.  Individual large companies may have 5 or more different types of programs deployed, each targeting different supplier segments, commodities, regions, etc.  Think that’s not the norm yet?   It may increasingly become the norm for companies if they want to access early pay.

Taken from the supplier’s perspective (ie, the middle market company), the administrative time and management to run programs from several buyers can be substantial.  As more and more adoption of these techniques take place, we think it is imperative to understand the middle market companies perspective as a potential user of multiple programs relative to securing credit facilities.

There are several key questions to address:

  • First, who makes the decision to finance versus use alternative finance techniques in a middle market company?
  • How are existing credit facilities used versus say dynamic discounting or reverse factoring offered by three or four of the companies buyers?
  • If a company is going to auction receivables via the ReceivablesExchange or some other invoice auction market, who makes that decision?
  • What are the criteria for using any alternative finance technique?

When I asked some companies about the criteria for their decisions when deciding about the issues above, typical answers  included:

  • We have receivables that are ineligible as part of our credit facility, so we look for options to accelerate payment here
  • We need to finance sales growth and current lines cannot accommodate.
  • We prefer advance rates of 98% via discounting versus 80% through factoring and the residual upon final payment.
  • The cost of fund differential between various techniques is large enough for us to notice.

There is much happening in this space, and many are placing bets with a superficial understanding of how a complex set of actions will impact their business model.

Interesting times for sure.

If you are interested in learning more about an upcoming study on this topic, please contact me at dgustin at tradefinancingmatters.com  I will be interviewing and surveying middle market companies to explore these issues much deeper.

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