A two minute guide
Investors, lenders and corporates are bombarded with propositions involving trade finance and trade receivables, especially from the new breed of alternative trade finance providers. This guide sets out the different business models and what they aim to achieve, splitting the market into three main approaches. All these approaches result in finance being provided for trade receivables, but in different ways.
There are also legacy financing models – which are provided by banks (documentary credits) and factoring companies (dual factoring). These are not covered in this guide but there are other guides (click the links) on these products.
Receivables and payables in trade finance refer to invoices arising between buyers and suppliers.
From the buyer’s perspective, an invoice is a payable
From the supplier’s perspective, an invoice is a receivable
One person’s payable is another person’s receivable.
Solution providers tend to focus on either receivables or payables, leading to three main business models:
Arrange financing from the buyer-side, then you have a payables financing (this is supply chain finance)
Arrange financing from the supplier-side: then you have a receivables financing, and there are two kinds:
repackaging a large portfolio of receivables for a single large supplier, or
open trade finance – working trade-by-trade, shipment-by-shipment with individual suppliers and individual buyers
It is rare for a single finance provider to provide a solution that works well for both receivables and payables.
A payable financing is commonly called “supply chain finance”.
In this situation, there is usually one buyer, and all his suppliers are then financed via some form of early payment mechanism.
For these trades, the financier is accepting a risk concentration on the buyer – because all of the receivables will be owed by that one single buyer. Moreover, these programs are expensive and complicated to set up, so generally they are:
Only for big and creditworthy buyers,
Implemented using a technology platform to connect an accounting system to suppliers who can then elect for early payment, which is then
Funded by relationship lenders to the buyer who have the credit appetite and take security. This allows them to offer a meaningful and large credit limit making the exercise worthwhile.
Examples of the technology players in this market are: Prime Revenue, Tungsten, and Trade Shift who coordinate funding from many 10s if not 100s of individual banks directed towards large corporate clients on their platforms.
This is not the same as supply chain finance. As already mentioned above, there are generally two kinds of trade receivable financing:
A single supplier financing receivables due from his multiple buyers – which can also be referred to as a “trade receivable repackaging”
Portfolios being created from multiple suppliers working with multiple buyers – which can also be referred to as the provision of “open trade finance”
In either type of receivables financing there are multiple buyers involved which diversifies the main risk in trade receivable finance which is the credit risk of the buyer.
Trade receivable repackaging
The motivation for this kind transaction is usually to raise finance for a large supplier who has many buyers.
For example, the supplier could be a multi-national with buyers (customers) all around the world. For the supplier, raising finance against its receivables (the invoices it issues to its customers) can be cheaper than borrowing in its own name. This is a repackaging of the trade receivables that are owed to the single supplier into some kind of loan or security.
Historically this repackaging trade was supported by banks who guaranteed investors would be repaid by providing a “liquidity facility” that could be drawn in the event of trouble. Today, this kind of liquidity facility is no longer attractive for banks to provide for regulatory reasons – so transactions are often being placed unsupported by a guarantee; investors today are therefore taking the risk that a failure of the single supplier at the centre of the deal does not cause the receivables due from the supplier’s customers to become hard to collect.
Transactions can be complicated to set up with high legal fees, and investment banks are usually involved. There are a number of fintech advisers and technology providers working in the mid-market, such as Demica, Finacity, and Channel Capital.
Multi-supplier receivables financing
This is “open trade finance” – financing that can be applied down to individual shipments from one supplier to one buyer. Good systems and processes are required so that the costs are low. Portfolios can then be created for investors that are diversified on both the supplier side and the buyer side - removing the single point of failure that exists in supply chain finance and in receivables repackaging.
This is the product that PrimaDollar offers. Working directly with individual exporters PrimaDollar is able to offer a competitive financing even for single shipments. PrimaDollar has a diversified portfolio of receivables which are originated from multiple sellers and involves multiple buyers.
Demica has successfully pivoted its technology which was built around repackaging receivables for large corporates to work on the payables side in order to offer supply chain finance. Other players in the large corporate space may well be doing the same.
PrimaDollar, a specialist in open trade finance, is now successfully providing payables finance alongside receivables finance for a material part of its portfolio. The reason is that banks are finding it increasingly difficult to finance the long tail of suppliers in distant countries, even for large corporates. This is because of compliance costs, also known as "on-boarding" costs. Banks find it expensive to on-board suppliers, and prefer to work only with larger suppliers who are closer to home. PrimaDollar has the infrastructure and office network that allows it to manage these compliance costs efficiently - so can work with suppliers that are typically cut out of traditional supply chain finance programs:
So a large corporate who wants deferred payment and open account terms from its remote and smaller suppliers is unable to support them with a traditional supply chain finance.
But PrimaDollar can on-board these suppliers and,
Since PrimaDollar can work economically shipment-by-shipment, financing can be provided alongside the supply chain finance program to those otherwise excluded suppliers .
There are also other guides useful to understand how trade finance works, and how PrimaDollar provides export finance:
One Minute Guide What is it? Export finance helps exporters to offer credit to their buyers. This means that they can offer "ship now, pay later" terms
One minute guide. Who is PrimaDollar? PrimaDollar is a UK-based trade finance platform working with exporters
One minute guide. What is it? Dual factoring is the process of coordinating two factoring companies so that one of the companies