As regulations continue to hammer major banks, small and medium-sized exporters are finding it increasingly tricky to access the financing they need. But alternative finance providers have slotted snugly into the gap, with old hands and newcomers to the market alike jostling for business in tightly defined niches. Michael Turner reports.
Changes to regulations, particularly net stable funding and increased capital requirements, have pushed major banks further away from providing trade-related finance to the world’s smaller exporters. The process has become more expensive for banks to participate in without the chance of scoring the sort of juicy ancillary business that their blue chip clients provide on a frequent basis via the capital markets.
“Conventional trade finance is a challenging area, particularly at the smaller end of the scale: you are doing the same amount of work for a smaller transaction as you would for a larger transaction,” says Guy Willans, COO at TradeRiver, which generally lends £200,000 to £5mn per transaction on an entirely unsecured basis.
Big banks still rule the roost in terms of volume, with BNP Paribas leading Europe, Bank of America Merrill Lynch and JP Morgan vying for top spot in the US and HSBC in Asia, according to analysts at Greenwich Associates.
However, borrower attitudes towards their trade finance providers are shifting, with a Greenwich Associates poll projecting swathes of companies looking to change banks this year. In total, 45% of respondents in the US said they expected to change trade finance providers in 2018, with 51% in Europe agreeing. A whopping 81% of Asian respondents to the poll said they would look to change their trade finance source in 2018.
According to the market intelligence firm, roughly 60% of US and European firms and 80% of Asian companies swapped trade finance providers in 2017.
Filling the gaps
It makes sense then, that there is a small but expanding funding gap in the market for the firms on the smaller end of the spectrum that is ripe for alternative finance providers and smaller banks to ply their trade.
“New players continue to enter the market and it is likely that we will see an even greater number of new players in the coming years, particularly in the smaller transaction space, as well as a greater number of local banks and specialist non-bank lenders,” says Emma Clark, global head of marketing and corporate affairs at specialist financier Falcon Group.
Falcon is certainly no newcomer to the market – it has been lending for more than two decades and has a regulated entity in Dubai, as well as credit ratings from Moody’s and Standard & Poor’s (Ba3/BB-). The group caters to the larger end of the small and medium-sized enterprise scale, with financing typically ranging from US$1mn to US$50mn.
One new arrival in the UK is London-based Wyelands Bank, which has been trading for around a year and provides financing of roughly £2mn to £10mn.
“In some cases, we have dislodged incumbents, not necessarily on price but in terms of our agility, speed of execution and flexible approach,” says David Locking, head of origination at the bank. He also believes that clients have become less wedded to the traditional banking channels.
Wyelands Bank has spent its first year focusing on receivables finance, but plans to move up the financing chain by expanding into asset-backed lending and supply chain financing in its second tax year.
“Alternative financiers are not going to offer every single product that your high street bank does,” explains Sarah Burkill, director of origination at Wyelands Bank. “But they are there to provide options to the business community, helping to bridge gaps and a wider range of solutions.”
The UK isn’t the only place where new smaller banks are sprouting up to fund international trade. Another young player is Anglo Gulf Trade Bank (AGTB), which at the time of writing had recently decided to base its headquarters in Abu Dhabi and had just become officially incorporated. AGTB will look at financing trade between the UK and United Arab Emirates.
Duck and weave
While they do not have the huge balance sheets, large staffing or brand recognition of the big banks behind them, boutique finance providers have the benefit over large banks of being nimbler, allowing them to react to changing markets far faster than major banks. A lot of this is down to two factors – an increased willingness from the top executives to explore new areas as they establish their niche, and the fact that boutique lenders are not encumbered by outdated legacy technology or processes that slow down or prevent quick changes of business direction.
“There is room to make significant use of fintech,” says Mark Emmerson, HSBC UK’s former head of global trade and receivables finance. “As an example, completing KYC, why does this have to be done manually?”
This is one place where new banks on the scene will have a distinct advantage, as, in theory at least, they can be more nimble than the incumbents, with no legacy technology systems that are potentially outdated.
What’s more, focused alternative trade finance lenders are usually able to give smaller companies, some of whom might not have ever exported before, the advisory attention needed to convince them to trade goods overseas.
“There is definitely a place in the market for those outside of major trade finance providers,” says Emmerson. “What SME bosses benefit from is that trusted relationship with a trade finance specialist who can introduce them to other successful exporters and provide expert knowledge.”
He believes that boutique trade finance offerings will take a “notable share” of the SME market from the larger banks over time.
A delicate ecosystem
Everyone spoken to for this article agree that alternative trade financers are not so much fighting with banks over SME clients – rather they are providing a service to companies that have fallen off the major banks’ radars. Alternative trade financiers’ relationships with banks are symbiotic rather than explicitly competitive.
And the service they provide comes at a cost. “We are always going to be more expensive than a bank but even getting banks to come to the table for these deals is going to be challenging,” says Willans at TradeRiver.
TradeRiver’s borrowers are looking at paying around 1.5% a month, equal to 18% a year. This sort of return is commonplace among alternative trade finance lenders, with higher returns available at the smaller end of the market where risk is greater.
“There are a few alternative trade finance providers that focus on one product and it can be done very quickly and efficiently,” agrees Emmerson, “but it tends to come at quite a high cost for the customer.”
However, boutique financiers argue that the hefty price of financing comes with benefits for borrowers on top of being able to access funds at all.
“At TradeRiver our funding is totally unsecured, with no security given in any way, shape or form,” says Willans, highlighting that for a lot of bank funding, at least some form of security is necessary to pass a deal through a credit committee. This can even include a personal guarantee from a borrower’s CEO, which many are understandably eager to avoid, regardless of how much they believe in the financial stability of their business.
Furthermore, the process is quicker at smaller lenders. “Most supply chain or trade finance solutions can be delivered in two to four weeks; a bank will take months,” says Willans.
While borrowers’ cost of funding may be high compared to major banks, there is some downward pressure on pricing at the smaller end of the scale.
By focusing exclusively on high volumes and low due diligence, the recent surge of new online platform lenders, such as those that offer crowdfunding and peer-to-peer lending, look to vie with one another on the only aspect they can really compete on – pricing.
“At the lower end of the market, it is envisaged that new entrants will compete on pricing rather than product, as their scope can be limited without the benefit and security provided by liquidity, as well as legacy,” says Clark at Falcon.
Ferocious competition
As lenders go further up the scale in terms of borrower size and creditworthiness, pricing becomes less of a bartering chip. Wyelands Bank, for example, expects average annual returns in the single digit percentages – which tops out at around a 0.8% return a month. Nonetheless, competition is just as fierce.
“Competition has certainly not gone away – in many aspects and it has got more competitive,” says Locking at Wyelands Bank. “It is important to compete on, among other things, service, the range of products, relevance and client relationship. We do not aim to compete solely on price as a matter of point.”
One bizarre challenge that lenders are facing is a scarcity of borrowers, as although SMEs make up the backbone of many economies, few of them are actively looking to finance exports.
“It’s a niche market but it’s still amazing that when you go around to see someone, you find that frequently your competitors have been there too,” says Willans at TradeRiver, echoing the sentiment of his peers. “There are about 47,000 companies in our universe, but once you weed out the companies that actually want or need to borrow and are growing, there are far fewer.”
GTR contacted a dozen SMEs for this article, all with international business lines. Of those that replied, the unanimous sentiment was that trade finance products were, in fact, not necessary.
“We are fortunate that over the years we have built our cash reserves so use working capital to fund all of our trade,” Lorne Vary, chief financial and business development officer at Brompton Cycles, tells GTR, a reaction echoed by almost all respondents.
However, the coming year could see more companies turn to trade finance products, according to market participants.
“Brexit means there is going to be a greater need for trade finance,” says Willans at TradeRiver. “There are going to be more big business failures – it’s going to be a challenging market all round.”
This would work out quite well for TradeRiver, which allows buyers to act as the borrower – essentially letting them fund their own suppliers via supplier finance.
“For example, a UK company exporting to the Netherlands could raise money by introducing their Dutch buyer to us and absorbing the cost in the UK,” Willans explains.
Elsewhere, it’s been recorded that the invoice finance sector is now providing more finance to UK businesses than ever before.
According to figures released by UK Finance, the third quarter of 2017 saw a 13% year-on-year jump in invoice finance in the UK and now stands at just over £22bn, the highest ever recorded. UK Finance notes that the “exporting picture is particularly strong”, with sales from clients through export invoice discounting facilities up 33% in the first nine months of last year, and export factoring up 11%.
This growth has been documented by a number of players in the market. Tungsten Network Finance, a global electronic invoicing firm, for one, has announced it nearly doubled total originated invoice outstandings to a record £54.5mn, an 89% increase from the previous reported peak of £28.8mn in October 2017.
“There is increasing understanding amongst businesses of all sizes of how invoice finance and asset-based lending can support them as they grow,” says Matthew Davies, director of invoice finance and asset-based lending at UK Finance.
The UK government’s industrial strategy report, published in November 2017, identifies financing issues as a clear problem for SMEs that are looking to grow. Various other surveys echo these companies’ frustration, with reports constantly streaming in about how financing is either too dear or entirely unavailable.
One thing is for sure, whatever the coming year brings, SMEs will need to finance expansion and development plans – some of it related to trade – and with banks still stinging from heavy regulation, there will be a demand for alternative lenders to fill in the gaps.
