Blog/News

Trade Finance vs. Bank Loans Part I: Why Trade Finance?

Sadie Keljikian and David Estrakh, Express Trade Capital

Trade finance helps to finance the costs of trade, usually the costs of importing or exporting goods and the costs of getting those goods to the end customer. Bottom line, business growth can be difficult to manage. As you gain customers, particularly big buyers and retailers, you may find yourself scrambling to maintain sufficient cash flow to keep up with and fulfill larger orders while maintaining standard operational overhead.

The Supply Chain Cycle Cash Crunch: The cash crunch wholesalers often experience is usually the result of the supply chain cycle: wholesalers, particularly importers, must lay out cash or use their lines of credit to start production, which can take months. Once production is complete, wholesalers typically have to pay remaining balances for the cost of goods plus shipping, duties, and freight. Even after goods reach you, you then have to pack, sort, and ship them according to each individual customer’s preferences. And then, even after the vendor finally ships the goods to their end customer, the vendor won’t be reimbursed for payments to their suppliers until the customers pay their invoices, typically 30-90 days after delivery. All the while, the wholesaler must pay their employees, rent, office costs, and other typical operating expenses. Thus, the supply chain cycle from production to delivery leaves their funds depleted.

Traditional Loans: Many business owners are inclined to take out traditional bank loans to supplement their cash flow, but banks providing loans often have stringent requirements, inflexible terms, and take a long time to receive. At the end of the day, traditional loans can be as much of a hindrance as they are a help.

Applying for a business loan involves exorbitant amounts of paperwork and substantial time to structure and underwrite, meaning funds generally do not reach you promptly. Banks also structure loans based on your business’s credit, meaning that any history of financial difficulty will count against you. Banks also tend to be especially conscious of risk, preferring to only provide funding when assets are abundant and therefore risk is low. Yet, the most obvious drawback of these loans becomes apparent when you actually receive the loan. Your line will generally be limited, inflexible and hard to supplement with alternate financing because banks often perceive other lending arrangements as potential threats to their own position.

Trade Finance Solutions: If you need capital to fund operations quickly and could use financial and logistical assistance throughout your supply chain, trade financing may be the best option for you.

Trade financing is different from a traditional loan, because funds are advanced based on your current transactions and your customers’ credit, rather than your own credit or that of your business. Since funds you receive are against your invoices and purchase orders, the financing you receive can grow with you. You also won’t have to worry about providing years of pristine financials. Moreover, since trade finance is tailored to grow relative to sales, you will not have to apply for credit line increases when your sales increase. As your purchase orders and overall sales increase, most trade financiers will increase their lines to accommodate the growth, thereby offsetting the funding gaps that arise when you have to pay more for cost of goods, shipping, and freight.

Click to read more about Express Trade Capital’s trade finance solutions.

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Factoring Varieties: A Beginner’s Guide

Sadie Keljikian and David Estrakh, Express Trade Capital

Factoring receivables is a simple, elegant solution for insufficient cash flow in business-to-business sales relationships. It allows vendors to sell large orders to retailers and assign the receivables to a third party, thus avoiding depleted operational funds while outsourcing collections labor and risk. Factoring often refers to a variety of different services bundled together: (a) A/R management and collections; (b) credit protection; and, most popularly (c) cash advances against receivables.

If you’ve recently decided to factor your receivables, you probably find yourself dazzled by the varieties of factoring and at a loss to distinguish how they differ from one another. Each type of factoring is ideal for addressing specific circumstances depending on the industry, sales volume and customers involved, among other criteria in addition to the specific needs and wants of the factoring client.

The following are a variety of factoring methods, some of which can be combined or modified to suit the client’s needs:

Full-Recourse Factoring

A very common practice for factoring receivables in general, a full-recourse factoring arrangement transfers the debt on invoices to the factor in question, but leaves the credit risk with the client. In other words, the client agrees to buy back invoices if the factor is unable to collect payment. This arrangement is popular when the client’s customers have poor credit and/or a history of delinquency on payments, because it does not require that the customer have good credit. While it is generally costlier because the risk is higher, full recourse factoring is also a good solution for clients who do not want their customers contacted. Many recourse factors are more willing to allow payments to be made to a lockbox in the client’s name rather than directly to the factor as is the case with non-recourse factoring.

Non-recourse Factoring

Contrary to full-recourse factoring, non-recourse factoring means that the factor absorbs the credit risk on factored invoices. This means that the client is not responsible for customers who pay late or not at all due to issues like bankruptcy, insolvency, and even refusal to pay without reason. In addition to lower costs, outsourcing collections, and enhanced lending options, non-recourse factoring has the added value of protecting the factoring client from poor credit or lost capital at the hands of delinquent customers.  However, to secure their receivables collateral, non-recourse factors want to notify and collect directly from the factoring client’s customers, which some factoring clients prefer to avoid.

Advance Factoring

An advance factoring agreement is one in which the factor advances the client a substantial portion of their receivables as soon as the goods are sold to the customer, less any fees. The customer then pays the factor within the terms of the invoice. Advance factoring can be done with or without recourse and is one of the more common varieties of invoice factoring. Advance factoring can also be called “receivables financing.” Since all open invoices are by definition considered receivables, any funding provided by using the receivables as collateral or security for the funding is considered receivables financing. Most factors offer advance factoring and most clients are mainly interested in this component of factoring, which is separate from the collections, credit protection and A/R management services.

Spot Factoring

Spot factoring allows the client to choose individual invoices to factor, rather than all open invoices or all of the invoices with a particular customer. This allows a vendor to fulfill small numbers of large orders as they come in, without worrying about insufficient operational costs or relinquishing control over the rest of their accounts receivable. The advantage is that the factoring client has very minimal or no commitments to assign invoices.  However, since the factor is taking on a larger risk and smaller volume, their rates are often substantially higher than traditional factoring rates which are given with the understanding the factoring client will factor all, or most, of their receivables.

Selective Factoring

This is a good option for clients looking for something in between the traditional factoring requirement to assign all receivables and the spot factoring option of no commitments but substantially higher costs. For those who don’t have enough sales volume to enter a long-term contract with a factor, selective factoring is a very helpful solution. Rather than factoring all or most receivables, which is very often required in traditional factoring agreements, specific accounts are chosen and only those customers’ invoices are factored. This means that a vendor with several small-scale retailer customers and a few big-box stores can accommodate the needs of both by factoring the large customers and handling the small accounts on their own (or vice versa at the client’s discretion).

Bulk Factoring

In bulk factoring agreements, financing is provided for the current total value of the client’s accounts receivable, rather than the usual practice of factoring invoices. There are a couple of reasons why a client might want to take this approach. Bulk factoring is popular among large-scale distributors who need to clear their balance sheets and improve their liquidity. It can also be helpful for vendors whose sales are mostly quite small and distributed among many customers, since bulk factoring removes the need to factor specific invoices. This practice also appeals to a lot of businesses because the client typically remains in full control of accounts receivable operations, including collections, keeping operational responsibilities in-house.

Non-Notification Factoring

If you prefer for your factor not to contact your customers, non-notification factoring is for you. This arrangement can be a bit more expensive, as the factor will have to do more work to avoid contacting customers. Funds often go to a lockbox and the factoring client’s customer may be unaware that the invoice is factored at all. While this is a good system for customers who might be slow to trust, you’ll find that many retailers are familiar with factoring and aren’t concerned by their invoices being factored.  Non-notification factoring is usually coupled with recourse arrangements because non-recourse factors who offer credit protection on receivables want more control, which requires handling invoices directly and notifying the customer.  If you want credit protection, this may not be the best option – it’s costlier and riskier, and its only advantage is that your customers are not notified by the factor.

Collection Factoring

In maturity factoring agreements, the factor takes over all credit, collection, and accounts receivable management functions and usually provides credit protection on the client’s receivables. Funding, however, is not provided to the client until the due date on the invoice or slightly thereafter. Basically, the factor performs all the service functions of factoring without the lending component and thus, there is no interest charge in the arrangement.

Industry Specific Factoring

Standard factoring usually applies to wholesalers who sell consumer goods to retailers. However, there are many industries that are unique enough to warrant factors that just cater to them. Some of these industries include healthcare, commodities, construction, shipping/logistics, service providers, and US exporters selling mostly to foreign countries, among others. Each industry has its own risks that require specialized knowledge. For example, to provide factoring on medical receivables, a factor must be familiar with how medical billing works and how insurance companies treat certain invoices, while factors who service sellers of certain food products should understand USDA and FDA regulations.


Although some factors have multiple specialties it is best find a factor that knows and specializes in your particular industry. Since factors are, by the nature of the relationship, watching out for their clients’ best interests and making sure they get paid, a good relationship usually involves some informal guidance and consulting. Consequently, it is enormously helpful if the factor providing the guidance has firsthand experience with and knowledge of your industry and the corresponding mechanics of it.

Each of the above varieties is designed to serve specific financial and organizational priorities, but the overriding theme is that most factoring is geared to keeping your cash flow healthy and your receivables safe.

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Collateral Damage Control

Sadie Keljikian, Express Trade Capital

If you need to finance your business, you will be required to provide collateral. No matter what kind of funding you seek out, nearly every bank and private financial institution will require an asset to secure the loan. This makes a lot of people nervous, the word “collateral” has developed an unfortunate connotation of expendability and brings foreclosure to many minds. Fortunately, this doesn’t mean that you’ll have to risk losing your business, home, or savings. Unbeknownst to many, collateral can take many forms and most business owners aren’t aware of the full scope of their options.

Collateral is a general term for assets against which a bank or private lender can provide your business with funding. Aside from the well-known practice of using buildings, equipment, or savings as collateral, trade financing also allows the use of accounts receivable, inventory, and purchase orders. Trade finance can offer solutions to numerous business models thanks to a variety of lending options. This means that you can receive funds to supplement your operational costs without risking your business or crucial assets.

With solutions like factoring and purchase order financing, you can borrow against existing orders for which you have yet to be paid. This is an excellent solution for vendors selling to retailers on open terms and allows you to increase your business’s cash flow without incurring long-term debt or potentially sacrificing your business.

If you own a retail shop or other store-front type of business, a merchant cash advance may be the best solution for you. MCAs are loans against your day-to-day credit card sales. You receive one lump sum and the lender takes a portion of your credit card sales until your loan and interest is repaid. Again, this means that your sales are your collateral, leaving you less at risk of losing vital capital.

The collateral you offer also helps to establish and raise your credit line in trade finance. This means that as long as you keep making sales and your customers pay on time, your credit with your lender will remain strong. You can fulfill as many orders as needed without worrying about deficient operational funds. Trade financing is also immensely helpful in padding out your working capital without accruing interest on the funds you’ve received. When your customer accepts the sale, the documentation thereof (either a purchase order or an invoice) becomes valuable for trade financing and leaves your jurisdiction. You receive payment earlier than you would have, minus fees, and are able to continue running your business without the concern of costs outweighing revenues.

In short, collateral is not a dirty word. Despite the understanding that your lender will hold a lien against your assets until you’ve repaid your debt, you can borrow funds to keep your cash flow healthy without fear of losing everything. Financing in smaller amounts and against your active assets allows you to grow with the knowledge that you are both sufficiently funded and protected from crucial losses.

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Potential Issues with Invoice Factoring: More from our Upcoming White Paper

David Estrakh, Express Trade Capital

Unforeseen Costs.  Like any financing arrangement, factoring can come with unforeseen fees and high reserve requirements. Be sure to carefully read your factoring term sheets and agreements before you sign them. Factoring is labor intensive and time consuming, not to mention, risky, so expect to pay for the service.  Although interest on factoring loans are more expensive than banks, you should still shop around to make sure you get reasonable market rates.

High Minimums.  Most factors have monthly and/or annual minimums to cover overhead and ensure consistent sales, which can be difficult if everyone is not on the same page regarding expectations.  If you sign up with a factor and do not like the relationship, you may not be able to terminate without paying off the minimum commitment.  It is therefore important to make sure that the minimum is not so onerous that leaving early becomes too costly. Otherwise, you may be stuck in an unwanted relationship.

Bad Credit Accounts.  Factors look at customers’ credit in order to determine the risk of advancing funds on receivables to be paid by that customer.  This is an advantage for clients because they can know the credit of their customers in advance, before shipping goods to them.  Unfortunately, a customer with bad credit can make things difficult when you’re factoring their receivables.  If a customer has a history of late payments or delinquency, that customer’s orders may not eligible for funding.

Many factors will still advance funds against non-approved receivables, especially if those receivables are bundled with credit-worthy accounts. But the client must be aware that the risk of non-payment on non-credit-approved receivables falls to them; such receivables are with recourse to the client.  Amounts advanced on poor credit receivables are usually less than what is advanced against credit approved receivables – often up to 60% instead of 80%.  But this is not always the case and many factors will simply refuse to factor receivables from accounts with bad credit.

It is important to note that different factors treat bad credit accounts differently and factors may look at the same customers differently.  For example, one factor might approve an account that another factor will not, although most factors will make similar credit decisions when presented with the same customer information. The reasons for a bad credit determination will also affect how much, if any, advances the factor is willing to make.  When these instances arise, tread carefully, heed the advice of your factor, and handle all poor credit accounts on a case by case basis.

Choosing the Right Factor. Let’s be honest, every industry has unscrupulous and unethical business people who give the others a bad name. Factoring is no different. Factoring is, at its core, a relationship. Once engaged, factors (especially those who also provide purchase order funding) control the levers of cash flow for their clients. Flexibility, speed, and understanding are paramount for a successful factoring and lending relationship.

The above is a segment from our upcoming white paper, Factoring Basics, keep an eye out for the full piece coming soon!

Learn about our factoring services here.

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Benefits of Invoice Factoring: More from our Upcoming White Paper

David Estrakh, Express Trade Capital

More Cash Flow.  For most clients, the main advantage of factoring accounts receivables is that it speeds up and simplifies the process of getting payment from their customers.  Once goods are shipped to the customer, factors can usually advance their clients most of the invoice total (typically up to 80-85%). The remaining funds are sent to the factoring client when their customer pays the invoice.

Accounts Receivable (A/R) Collections.  Once funding is provided for the order, the factor assumes responsibility for collections on all factored invoices (i.e. Accounts Receivable or A/R), thus leaving the factoring client and their staff free to operate and grow their business.  Clients no longer have to follow up on late payments or worry about whether they forgot to collect payment on an invoice.  The labor intensive and burdensome task of collections is essentially outsourced to the factor whose expertise and economies of scale allow for a better, more efficient collection process.

Funding Flexibility.  Factors usually have fewer credit requirements than banks, which means access to more cash than clients would have with a traditional bank loan.  Since factors are usually private entities that don’t have the stringent credit and regulatory requirements imposed on banks, they can make riskier, quicker, and more entrepreneurial lending decisions.  This means less bureaucracy, greater speed, and substantially more lending flexibility.

Increases Revenue Ceiling.  Factoring removes limitations on sales. Factoring clients no longer have to turn down high-volume orders due to inhibited cash flow because there is technically no limit on borrowing against receivables; the more receivables a client generates the more assets they have to obtain additional funding.  Since businesses are capped by their access to capital, if a company does not have sufficient capital to produce goods, they cannot fulfill orders. Factoring helps bridge this gap.

Credit Protection.  In non-recourse factoring, the factor assumes the risk of default by the customers.  When credit protection is provided, the factor absorbs the risk that a customer (i.e. the invoice debtor) will fail to pay due to bankruptcy or insolvency.

Bookkeeping / Management.  Management of accounts receivable is an often overlooked aspect of factoring. Keeping track of payments, past due invoices, and customer disputes while maintaining a record of all the transactions is best left to professionals.  Factors have every incentive to track payments because that’s how they get paid.  Factoring clients therefore receive the added benefit of outsourcing a time consuming and hassling component of their business for a fraction of what it would cost to hire employees to manage and keep track of A/R.  Factors are also better situated to handle collection and management duties because of economies of scale – by handling accounts for many clients, factors have more leverage over customers because factors have more resources than any one of their clients could individually.  Factors are also more experienced and knowledgeable in collections.

The above is a segment from our upcoming white paper, Factoring Basics, keep an eye out for the full piece coming soon!

Learn about our factoring services here.

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Receivables Defined: Preview of our Upcoming White Paper

David Estrakh, Express Trade Capital

Receivables are amounts owed to a business for goods provided or services rendered. Any time a seller delivers goods or services to a purchaser, and both parties agree to exchange payment at a later date, a receivable is created. It is common for the seller to send the purchaser an invoice (or bill) which represents the receivable and summarizes the details of the transaction. The invoice usually includes a description of the goods or services provided, the amount to be paid, and the payment terms or payment due date.

The owner of a receivable (i.e. the party to whom money is owed) does not have a valid receivable until they have first performed all of their obligations– the goods must be shipped to the customer and/or the services rendered. Invoicing customers prior to fulfilling their orders is termed pre-billing; using pre-billed receivables as collateral can cause problems with customers and lenders and may be considered fraud. Therefore, the seller can bill their customer and claim the billed amount as a receivable only after performing in full. Lenders can then advance cash against the receivables.

One of the factor’s main functions is to advance funds before the receivable matures and the corresponding payments are due. Essentially, factors speed up cash flow by making future payments available in the present. In addition to lending, many factors also secure receivables by providing credit protection, collections, bookkeeping, and other services related to the management of receivables. Such services help to control and protect the underlying collateral while offloading the client-borrower’s risk and outsourcing their A/R management duties. Once a customer pays an invoice, any balances still owed to the client are paid at that time and the receivable is closed thereby ending the transaction.

Factoring Example.  Let’s say your company manufactures watches and just shipped a $50,000 order to a big-name retailer. You send an invoice to the retailer and then have to wait to get paid, usually 30-90 days. Instead, you can assign your invoice to a factor who will advance you up to 80% of the value of the open invoices and reserve 20% in the event of charge-backs or disputes. In this case, the factor could advance up to $40,000 and the remaining $10,00 will be paid to you once your customer pays the factor (minus the factoring fees and any charge-backs).

 

The above is a segment from our upcoming white paper, Factoring Basics, keep an eye out for the full piece coming soon!

Learn more about our factoring services here.

Contact us for more information.


Performance Sports Group Ltd. Enters Chapter 11

Sadie Keljikian, Express Trade Capital

Performance Sports Group Ltd. has filed for bankruptcy protection in the US and Canada. The company announced that it was facilitating a restructuring and sale of nearly all of its assets on Monday morning.

Performance, maker of Bauer ice hockey gear, announced that it would auction its assets to reconcile its debt. The announcement, however, came after Performance had a deal to sell a majority of its assets to Brookfield Asset Management for just over $575 million. Brookfield, an investor group, is led by Sagard Capital and Fairfax Financial Holdings Ltd. Former Chairman of Performance Graeme Roustan said in August that he was working with investment banks to find a bid. On Friday, Reuters clarified by reporting that Performance would enter bankruptcy protection with a buyer in hand and would seek out higher bids.

It is important to note that Performance’s difficulties demonstrate a wider national trend. Recently, increased competition in North American sporting goods manufacturing presents numerous challenges to all domestically based members of the industry. Due to the industry’s recent turmoil, Sports Authority Holdings Inc. have taken some financial hits in recent months as well. The retailer filed for bankruptcy in March, triggering a $90 million loss of Performance Sports inventory, according to Wall Street Journal.

Performance listed both its assets and liabilities in the range of $500 million to $1 billion. The company listed both amounts in its voluntary petition filed under Chapter 11 in Delaware.

Despite the numerous complexities of this case, Performance claims that operations will continue as usual during the bankruptcy process. Brookfield and existing lenders will provide $386 million debtor-in-possession financing. Performance also announced management changes, President Amir Rosenthal and Executive Vice President Todd Harmon left on Friday. Furthermore, Dan Sills was named executive vice president of hockey, Mike Thorne is now executive vice president of baseball and softball, and Jennifer Hughey was named senior vice president in charge of supply chain management.

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Giving Data Credit Where Credit Is Due

Drew Cohen, Express Trade Capital

The nascent, burgeoning big data lending industry shows few signs of abating. For the foreseeable future, it will continue to complement, rather than supplant, traditional lenders. In the next five years, competition, as well as new oversight in the form of state and federal regulations and the expectant slew of fair lending class actions suits, will begin to winnow the number of big data industry players just as it has for every major American industry from the early days of the oil refinery boon 150 years ago to the telecom industry.

It will take years, however, for lenders to determine which specks and footprints of online information are ultimately useful, yet non-discriminatory. This iterative discovery for the holy grail of accurate, predictive data will be slowed given the constant flux of consumer’s online behavior. The ever-present specter of the next Facebook or Snapchat belching out new types of data will continually force the industry to pivot and recalibrate its models.

Just as the rise and variety of online data tracking tools has been big data’s raison d’etre, the consumer’s recent clamoring for anti-tracking software provides some reason for pause. As a possible harbinger of changing expectations, and to the publishing industry’s chagrin, Apple’s new iOS9 operating software released in September includes robust ad-blocking apps.

In the near term, however, the big data credit industry will continue to make aggressive inroads, and be a boon for potential borrowers with little or no payment history, such as students and new business owners. Expect the splintering of lending verticals to intensify as alternative underwriting firms aggressively expand from peer-to-peer to business-to-business ventures, as general proof of the data-mined lending concept is verified.

Download the full article by Drew F. Cohen published in The Secured Lender

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The Future of Lending

In 2014, the former chairman of the Federal Reserve, Ben Bernake – the man who was once responsible for setting the United States’ interest rate policy – was summarily rejected by his bank when he tried to refinance his mortgage. The reason: he just changed jobs, which, according to an anachronistic credit metrics, indicated an intolerably heightened credit risk.

The credit analysis did not weigh his future earning potential – he was gainfully employed by a think tank and had just signed a one million dollar book deal. In fact, even the most cursory web search would have revealed that refinancing Ben Bernake’s Washington, DC house is one of the safest bets a local bank could make.

Download the full article by Drew F. Cohen