When a company receives an order from its end-customer, fulfilling the order is not always as simple as shipping goods to the customer and receiving payment. In many cases, an initial outlay is required in order to purchase the goods from their own suppliers. As a result, it is not unusual for small and medium-sized enterprises (SMEs) to find themselves in the position of being unable to fund their customers’ orders.
This is particularly the case when SMEs are importing or exporting goods. For example, the SME may have to pay a deposit upfront to its suppliers to secure the goods and then pay the remainder upon receipt before shipping the goods back to the UK. The SME then delivers the product to the end-customer and only then does it submit its invoice, which may not pay the bill until 45 or 60 days later.
SMEs in this situation face a significant funding gap. Without funding, SMEs may not be able to fulfil their orders, but in many cases banks are unwilling to finance them. In response to these challenges, companies are turning to other sources of finance.
Trade Finance Partners (TFP) is a specialist trade finance company which was set up in 2011 along the lines of an old-fashioned merchant banking model. Last year the company secured a £25-million three-year trade finance facility from Macquarie Bank. In addition to providing finance to SMEs, TFP offers a comprehensive service, including structuring transactions, arranging shipping and logistics, and paying VAT and import duties.
“Our approach is to purchase goods from the SME’s suppliers and to take ownership of the goods,” explains William Tebbit, the company’s commercial director and one of its founding shareholders. “Once the goods are on the water, we sell them to our SME client with retention of title, on terms which broadly match the end-customer’s payment terms. When our client invoices the end-customer, the receivable is assigned to us – and once the end customer pays us, we pay the profit to our client.”
Under this model, TFP assumes the risk that the end-customer will not buy the product, at least until the receivable has been created and credit insurance can be purchased. “We take true risk by physically buying the goods – yes, there is a purchase order, but there is no receivable created at that point,” says Mr Tebbit. “Our clients like this model because they can see us taking risk.”
Unlike banks, TFP purchases goods rather than lending money and is not interested in evaluating its clients’ balance sheets. As a result, TFP is willing to partner with companies which are looking to fulfil their very first order, as well as those with an existing multi-million-pound turnover.
How do the end-customers feel about this type of arrangement? “Usually end-customers like the fact that TFP is involved because it gives them one less thing to worry about,” says Mr Tebbit. “Without finance, the end-customer may be concerned that the goods may not end up on their shelves, particularly when suppliers are struggling with 90-day payment terms. Some clients take us with them when they pitch for new business and explain that we are funding their supply chains to give the customer the certainty that, if they place an order, they will receive the goods.”
Given that bank lending to SMEs has reduced by 40 per cent since 2008, it should come as no surprise that TFP’s approach is proving successful. The company reported revenues of more than £12 million in 2011, its first year of operation, and is on track to reach £45 million in the current year.