Insights into International Lending
Insights into International Lending
During the 2017 CFA National Convention in Chicago, a wide range of topics were discussed. However, there was one recurring theme that kept coming up repeatedly, and that was the need for reliable cross-border lending solutions for middle market companies. According to the National Center for Middle Market, half of all middle market companies are already doing business globally, and 92% of globalized middle market companies intend to do even more business outside the U.S. in coming years.
This topic was addressed by a panel comprised of niche providers currently in the trenches working with small and medium-sized clients. While they debated the various challenges their clients face when looking for global financing solutions, and the challenges they come across themselves as lenders, they all agreed on one thing, globalization is here to stay. Lenders need to get onboard with providing the middle market with international financing solutions.
The panel, titled Insights into International Lending, was comprised of Tessa Payne of FGI, Ed King, founder and CEO of King Trade Capital, Matt Stanley from ExWorks, and Ian Volley, founder and CEO of Eagle Business Credit. The panel was moderated by Alister Bazaz of Bank of America.
Alister kicked things off by stating, “when I started my career in international banking, I started accumulating, if you like, a toolbox of solutions. One solution alone did not necessarily meet the needs of a client but, when strung together, you could do some really nice things.” He went on to identify the focus of the panel discussion to be how independent non-bank lenders are providing financing solutions to clients doing business overseas and set stage with, “when I think of international, I think we’re in the solutions business. And not everybody has the toolbox.”
He then asked panelists to introduce themselves.
Ed introduced himself first, “King Trade Capital is a small to mid-sized purchase order finance company. I started the business 25 years ago to fill a need. People were having a lot of trouble financing cross-border trade, whether it was imports or exports.”
Matt Stanley offered a similar reason for starting ExWorks Capital. He had noticed there was a void in the lower end of the middle market for those doing cross-border trading. “We should all recognize there’s a much bigger part of the world outside of the United States, though I think sometimes we forget that.”
Tessa discussed how FGI was founded as a lending platform with the belief that the middle market was going to start globalizing. As the company developed its best practices, brokering and structuring credit insurance policies also became a service they began to offer. FGI then went on to develop its own propriety credit insurance management platform called T.R.U.S.T.TM to help lenders maximize the benefits of credit insurance.
Alister asked Ian, who started the export factoring business at Bibby in the UK after a career at Barclay’s, “what’s going on in Europe and around the world in the small and medium-sized business financing space? We always assume it’s the same there as it is here. Can you talk about that?” To that question, Ian responded, “They’re vastly different. Helping the smaller UK company grow, they pretty much recognize if they want to get to a certain size they’re going to have to export at some point. So, they’re not necessarily scared of it.” He continued, “But over here it’s very different. You can build a business without exporting, so why bother? And then if you want to get into it, how do you do it?”
Alister then asked the panel to describe, from their perspective, what types of solutions the typical “domestic financier” has difficulty providing. Ed noted, “we tend to see a lot of manufacturers that have an opportunity to sell to the Middle East. Often in those situations, we’re helping provide production finance.” Tessa offered that one of the biggest needs FGI’s financing arm has been seeing is, “lending to foreign subsidiaries of US or Canadian parent companies in situations where their bank is unable to lend to them overseas, there are no local financing options available, or the company prefers to work with a US lender rather than a local bank.” And then added that when it comes to their credit insurance brokerage arm, “we are primarily working with exporters, helping other banks and finance firms that are lending to exporters to insure those receivables, monitor that policy and help them to make sure that the insurance works for them.” Matt noted that at Exworks, “we’ve seen a significant amount of technology companies of late that have proprietary intellectual property. In these cases, not only do we need to look at the traditional collateral sources, receivables, inventory, and perhaps fixed assets, but at other sources of value that are sitting there as well,” he explained.
Alister observed that the solutions being discussed appeared more bespoke than what a larger bank could typically offer a client. Matt agreed stating that “it’s not a one size fits all, certainly from the size standpoint and the credits. It’s about how to get to significant additional liquidity above and beyond what the client currently has, or what they really need to drive the growth.” Ian added that “as long as you understand your client’s business, there is a way to do it.”
The panel also spoke on the subject of cost, and that it should not be viewed as a deterrent when looking to do business or to help a client do business overseas. Ed pointed out that the key is to “focus on the cost of the lost opportunity.” Tessa noted, “at FGI, the cost of execution is greatly reduced when compared to those of a bank with big overhead. The infrastructure is already set up and it’s very easy for us to execute quickly and with certainty.”
Next they explored the advantages of banks partnering with firms like those on the panel versus a bank or company taking on international lending on their own. Ian warned that “it can be very dangerous if you play at it. You should partner with somebody who knows what they’re doing.” Ed added, “by partnering with the right company, those looking to move into international business will reap the benefits.”
Alister then turned the conversation to credit insurance and asked Tessa, “Why is the space changing?” to which Tessa responded that globalization and technology were the driving factors behind this change. She explained that advances in technology have helped increase the industry’s comfort level with using credit insurance to mitigate risk and noted that, “our philosophy at FGI is that credit insurance is as useless as the paper it’s written on if you’re not monitoring it and staying in compliance. That’s why we developed the T.R.U.S.T.TM platform.” Ian agreed, stating that T.R.U.S.T.TM was a tool he used at Bibby to effectively manage policies. He also noted that, “factoring and credit insurance are very closely aligned as they are both dealing with debt, invoices, and making sure that people pay. You want to offer that risk to somebody if you’re in a foreign situation, you want to know that it’s passed a test somehow. So why not offload that risk to a credit insurance company?”
Alister wrapped up the discussion by asking for final advice from the panelists. They offered that clients will continue to ask for international solutions as more emerging markets demand western products and services, and that lenders need to be able to provide the middle market with international financing solutions. They identified technology as playing a big role in the growth of this new trend, both as far as communication goes and from a financing perspective. The panel addressed the importance of educating clients rather than selling them, stressed that international lending is a nuanced business and therefore should not be seen as a “hobby,” and emphasized the importance of partnering. Large banks have not been able to properly address the international financing needs of middle market companies due to scalability, cost and time inefficiencies. Therefore, collaboration is key when addressing the complex needs of international clients and by partnering with companies who have invested the time and resources to develop their expertise in this area, banks can avoid unnecessary risk and clients will be best served.