How do you make an immediate impact in the saturated UK SME finance marketplace? You do something no one else is doing. In 2016, against a backdrop of ever-increasing competition in the financial services sector, Seneca Trade Partners (“STP”) was launched. The mission was to provide stock finance to UK businesses at up to 100% loan to value (“LTV”).
Stock Finance has long been considered one of the most difficult types of working capital finance to deliver to small, expanding businesses. Finance for stock exists in a number of forms, none of which seem to fit the requirements of a growing number of UK businesses. Existing stock finance providers are located at either of two extremes. At one end of the spectrum, institutional lenders advance funds on the basis of strong security, very low risk and low margin, and at the other end, smaller niche providers lend funds on a template of weak security, very high risk and high margin.
Trade Finance is not Stock Finance
At the low-risk end, there is Trade Finance which has been around for as long as there has been the exchange of goods for cash. In the modern financial marketplace, Trade Finance is effectively an exchange of documents, and Trade Financiers are often considered to be taking Bank risk rather than product risk. Trade Finance involves finished goods or commodities, large businesses, big transaction sizes, standard documentation, very low risk, and relatively low margin.
There are also some low risk Stock Finance facilities provided by Asset Based Lenders, who will provide funds secured on unencumbered stock at up to around 30% LTV. This sort of finance is seldom useful to rapidly growing businesses as it leaves a gap on inbound stock purchasing that’s too big to fill from cashflow, so this type of finance is usually used as a way of raising working capital for other purposes, rather than specifically for the purchase of new stock to fulfil a growing order book.
What about new Financial Technologies?
At the other end of the risk scale are the new breed of Fin-tech lenders who provide facilities of up to a few hundred thousand pounds in the form of unsecured business loans. These loans are used by some borrowers to buy stock, but they are not stock loans, they are term loans. They are often unsuited to smaller but rapidly growing businesses as once these loan funds are spent on stock, they do not revolve in line with the stock trading cycle. The funds can be used once but that’s it because the liquidity provided by the loan is quickly lost in general cashflow.
A changing landscape
A key trigger for the launch of STP was the removal of credit limits by suppliers that many UK SMEs have found themselves experiencing. UK businesses have for many years benefitted from some level of credit from their overseas suppliers, but such credit is nowhere near as common as it once was and many suppliers are insisting on deposit payments before goods are even manufactured, with payment in full generally expected prior to shipment.
STP puts stock purchasing power in the hands of smaller growing businesses that have a growing sales pipeline but cannot obtain credit from suppliers.
So, if there is demand for 100% stock funding in the marketplace, why has that demand not already been satisfied? Why is there a shortage of dedicated Stock funders in the UK?
The answer is simple. Stock funding is difficult.
Providing 100% LTV stock funding in a low-risk way requires a thorough knowledge of UK trading laws. It is operationally intensive, it requires flexibility and it demands constant vigilance and discipline.
In order to benefit from Retention of Title-based (“ROT”) security, stock funders must insert themselves in the supply chain. This means paying supplier invoices directly and reinvoicing the goods onto their client. That creates a lot of paperwork, and where the stock is made up of goods that are not finished, ROT is quickly lost.
Stock funders are forced to accept a weaker security position than most other secured lenders, even if the stock funder holds a debenture over their client’s business. This is because stock funders only ever benefit from a floating charge over the stock they fund, unlike invoice financiers for example, who under UK insolvency law hold a fixed charge over the book debts of a business.
In the event of a client insolvency, it’s a generally accepted rule of thumb that stock funders will lose out, as their stock turns into the invoices that are either the property of an invoice financier, or the business itself and the proceeds of the sale of the stock will be shared amongst secured creditors and be subject to statutory deductions.
What about the risks?
STP was founded with the mindset that just because something is difficult, it doesn’t make it impossible. We mitigate and control risk in various ways:
- We choose our clients carefully, based upon their trading history;
- We have exceptionally good processes and controls;
- We take supplementary security where necessary;
- We arrange formal tie-ups with Invoice Financiers, where we are paid directly by them as our stock is sold;
- We structure our facilities in a way that provides a constant flow of stock-purchasing liquidity. If repayments are not kept up to date, we can suspend funding whilst we solve whatever problems have arisen in the business or the supply chain, before the situation gets out of hand.
In its first two years, STP has purchased more than £15m of stock on behalf of its clients and has a current stock loan book of over £4m. We are particularly proud of our low default rates and that STP has been profitable as a business since inception.
The ambition for the business is to grow in scale in a measured way, and to become the go-to provider for 100% LTV stock funding to SMEs in the UK.