The Rise of Trade Receivables Finance

London - 9 December 2009

In light of recessionary pressures, businesses are set to increase their use of trade receivables-based finance, says new Demica report

The latest research from London-based working capital solutions provider Demica shows that firms are increasingly seeking to raise finance from traditional asset categories such as trade receivables. The report, which surveyed over 1,500 firms with over 50 employees in the UK, France and Germany, revealed that Europe is turning back to trade receivables, considered to be one of the most liquid and creditworthy asset categories on the balance sheet. The current scarcity of credit was listed as a major setback, encouraging firms to raise a greater proportion of finance in this way. A significant number of firms also reported having no other choice but to offer asset categories such as trade receivables if they were to convince banks to extend lines of credit.

Some 36% of European companies (UK 31%, France 43% and Germany 34%) reported that they had already raised finance against the security of their trade receivables. Furthermore, finance raised on this asset category is set to grow substantially over the next 12-18 months. Just under half of respondents (44%) said they planned to increase their levels of finance raised against the security of trade receivables. Germany and the UK showed the most interest in developing this technique, suggesting that they will soon match already elevated levels of uptake in France..

The European Securitisation Forum forecast overall securitisation issuance to fall to €272 billion in 2008, the lowest level since 2004. However, the decline in overall securitisation activity is thought to be a direct result of problems caused by low quality assets – with solid assets such as trade receivables not experiencing the same negative impact. Securitisation of more robust, stable assets such as trade receivables is expected to rise. Demica’s research sought to quantify this, and found that 56% of European firms believe the scarcity of standard bank credit will see large firms choosing to raise a greater proportion of their finance on the basis of trade receivables securitisations.

Banks seem equally keen for firms to offer this asset category, as the solution lifts the lid on lending without taking on unacceptable risk. Over the last year, commentators have witnessed a rising demand for greater levels of security from banks’ clients to avoid facing caps on their credit limits. Demica’s research showed that 61% of European firms had experienced this, recognising that certain banks are unwilling to extend credit unless businesses can offer stable assets such as trade receivables as security.

Demica CEO Phillip Kerle comments: “Scarcity of traditional credit has become a real problem over the last two years. If European firms are to raise finance successfully in the future, the focus will have to be taken off liquid assets. Trade receivables are leading the way as invoice debt is seen to be a high quality security and therefore has the ability to improve access to credit significantly.

“Astute firms are finding ways around the current liquidity crisis by expanding the level of finance raised on the security of their trade receivables. These lines of finance have the additional benefit of being less complex than other transactions and although, to a certain extent, they remain complicated, they are relatively easy to monitor and therefore incur less risk. Specialist technology-based services are available that automate these processes and provide regular monitoring and reporting of the asset base. We can expect take-up of such services to soar over the next year. “

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