The market for North American mid-market corporate financing is highly efficient in some areas, but lags behind our European counterparts in others. Whilst the Asset-Based Lending (ABL) market is very deep and competitive, when it comes to off-balance sheet structures, pricing in the U.S. mid-market is much higher than the equivalent product in Europe.
Trade Receivables Finance (TRF) allows for an off-balance sheet structure to replace or complement existing credit facilities. In North America, many Receivables Finance structures are priced at high single-digit rates, generally higher than the ABL market. This is a peculiar phenomenon, considering the similarities in collateral. With a European funding partner, many corporates could quite easily finance their receivables at a lower cost, typically at L + 300-500.
To be fair, there are real reasons for this disparity in Receivables Financing spreads. Due to a combination of specific market conditions and historical factors, US-based funders struggle to offer the sort of competitive off-balance sheet pricing which would tempt corporates into a TRF program. In addition, TRF suffers from a branding issue. There is a common misconception in the US that TRF programs are a last-resort option for firms that are struggling for cash. However, where US funders may fall short, their European counterparts are increasingly looking to fill the void.
Looking Across the Atlantic
The TRF picture in Europe could not be more different to the American story. Borrower-friendly liquidation regimes make ABL in Europe difficult, and as a result, TRF is a key aspect of the financing structure of many European corporates.
Because of the prevalence of Factoring and Receivables Financing in Europe, TRF funders are much more sophisticated in assessing this type of risk and in accessing funds for the asset class—the former improves the advance rate that they can offer to companies and the latter decreases their funding costs. European financiers are thus able to provide pricing that is favourable relative to their North American counterparts, and some of these funders are actively seeking to build assets in North America.
In a globalised world, the number of funding options that corporates have are greater than ever. As more and more European funders look to North America for TRF opportunities, US mid-market corporates would be well advised to return their admiring glances.
The creation of more attractive financing opportunities for many North American firms, who until now have been paying high single digits for off balance sheet programmes, or not implementing them at all due to the cost, will make the North American mid-market corporate finance market more competitive.
Demica connects companies to leading funders around the world, bridging the gap between such markets. This creates an opportunity for North American mid-market companies to access the broadest possible funding.
If you’re interested in financing your receivables for a competitive source of liquidity, the Demica team would be delighted to help you find a solution for your Receivables Financing needs. Fill in the form below and one our team will get in touch.
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Andrew Holmes joined Demica from Barclays, where he led the Trade and Working Capital team in the Americas. He was with Barclays for nine years, with most of that time spent in the Trade Finance business.