Will Alternative Finance Options Erode Middle Market Credit Facilities?

Bite-out-of-money

To the best of my knowledge, there is no study that has examined how middle market companies will use existing credit facilities versus the emerging alternative business finance techniques (primarily supply chain finance and dynamic discounting and to a much lesser degree for smaller mid market companies, invoice auctions, pcards, merchant cash advances and marketplace lending.

Most of the industry information around fintech and alternative finance models centers around large companies and their supplier ecosystems.  Whether its reverse factoring, dynamic discounting, pcards or other techniques, the focus is on the buyers, not their supplier ecosystem.

While most Asset Based Lenders (ABL) and factors will tell you this is not eroding their clients’ receivables, part of their challenge is they don’t know what they don’t know.  Perhaps their biggest concern should be not their competition, but what they are losing to the likes of C2FO, Taulia, Basware, Tungsten, etc.  I had one ABL tell me they lost a $1.5M factoring client to C2FO. Okay, so it’s anecdotal, and that’s why we need data.

Companies can fund themselves in numerous ways.  That tends to differ by size of company.  Very small Mom & Pop companies with less than $2 million in sales typically have few options.

As I pointed out in Small Business Confused About Alternative Lending Options the Fed knows that there is a vacuum in banks lending to small business.  No one wants to deal with these guys unless they sign over their life with personal guarantees. Too risky. Too small. Too focused on one key employee. That’s where marketplace lenders have filled a void.

But what about the lower middle market ($5m to $20M)?  Or mid Middle Market?  Or the Upper Middle Market? What percent of their receivables are funded via:  Bank credit lines?  Factoring? Invoice discounting? Adhoc finance programs like DDM and SCF?   Do these companies envision moving to more adhoc financing techniques?

These are questions that need to be addressed.  Too many vendors are offering solutions assuming “suppliers” whom they have no relationship with, will use their solution to receive cash earlier.  But remember, a $25 million dollar company has a revolving credit facility plus other forms of finance available.  If they start to actively use alternative business finance techniques, what does that do to their facilities and relationship with their lender?

Yes, certainly things to think through.

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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First Voice

  1. Bhriguraj Singh:

    I work in trade finance and would be interested in learning more about this topic.

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