Trends in working capital funding: Q1 2023

Demica works with a wide range of investors to find funding for corporate transactions in the trade and working capital space. These deals range from simple single-debtor receivables finance, to structured receivables securitisations, factoring deals and payables finance.

Bank funders broadly fall into two categories: trade and capital markets teams. Generally, trade teams focus on receivables and payables financing, while the capital markets team focus on the receivables securitisation side. This varies from bank to bank, and we are seeing these teams becoming increasingly co-ordinated, indeed at certain banks all working capital products sit within one team.

We find banks to be largely relationship driven, meaning that they will focus on working capital solutions as part of a wider relationship strategy. Does that mean that you need to already do business with a bank for them to agree to finance your receivables? Not necessarily, some banks see these products as a gateway to a new relationship. Others may even be able to consider these deals on a standalone basis, particularly in the securitisation space, however this is the exception rather than the rule. This trend may cause certain corporates to look elsewhere for working capital funding. For diversified pools of receivables, one such option is factoring houses. Whilst these are often attached to large banking groups, they are generally less relationship driven, and can offer competitive pricing.

Where many banks will focus on investment grade or equivalent customers, many non-bank funders will consider transactions across the risk spectrum, although likely at higher yields. Some non-bank funders focus on a range of transactions, others are specialists: by product, geography, sector (for example the growing number of specialist lenders focused on commodities). Examples of non-bank funders active in working capital finance are M&G Investments, with whom Demica recently worked on a transaction for our customer Sonovate, Pemberton Asset Management, Santander Asset Management.

Many non-bank funders consider trade and working capital finance to be an attractive asset class, and this perception has only increased recently with rising rates. Some non-banks are also expecting changes in the regulatory capital regime that banks must adhere to (transition to Basel 4) will lead to wider pricing and more opportunities for them in this market.

_{Disclaimer: This document has been prepared by Demica Limited and Demica Finance Limited (collectively “Demica”).  It is for information and discussion purposes only. Any views and opinions are those of the commentators, unless otherwise noted. This is not investment research or a research recommendation for regulatory purposes. Demica shall have no liability for any errors, inaccuracies or omissions in the document.}