Finetrading - How purchase financing makes companies flexible

And Why Procurement Financing Companies Need a Strong Refinancing Partner

First of all, companies that trade and process goods have to pay for their purchases before they are able to make a profit. Procurement financing companies are able to help here with finetrading by providing liquidity. Alexander Reil and Dennis Koopmann, Corporate Customer Advisers who specialise in leasing and factoring explain why this is a profitable business and how NORD/LB refinances procurement financing companies.

Mr Reil, Mr Koopmann, what is finetrading in general terms?

Alexander Reil: Finetrading, or procurement financing, is a tool for financing the purchase of goods. The term is made up of the words finance and trading. It is thus a variation of the well-known supplier credit. While goods are supplied to the purchaser, nevertheless, they are paid for immediately and directly by the procurement financing company. The underlying trading transaction could be, for example, the purchase of steel by a machine builder for its manufacturing. The business calculates how much steel it needs for the next six months or year and buys a portion.

What benefit is afforded to businesses if they finance a commercial transaction through a procurement financing company?

Dennis Koopmann: Normally, the settlement can be optimised if the transaction is carried out through a procurement financing company. For a start, this is due to the fact that the delivery and trading channels are checked by the company and conform with certain standards and this includes the stipulated trade credit insurance. The company has experience in these matters, it guarantees professional settlement and, on account of the high volumes, it is able to obtain a better price for the trade credit insurance. Moreover, the final customer usually has contacts at the procurement financing company who have a background in trading and who speak the same language. Then again, the company understands the bank.

Alexander Reil: Furthermore, for NORD/LB the transaction is thus very much easier and more granular than if we were to do this as a direct transaction. As we transact the deals on the basis of credit lines that have already been approved for the procurement financing company, we are able to act more quickly and commit to such a transaction within a few days. Companies are thus more flexible. In addition, these days, it is frequently important for companies to further diversify their funding side and finetrading constitutes another element in the financing mix.

Dennis Koopmann: As the procurement financing companies are normally able to generate income from early payment discounts, and to some extent they pass this on to customers, going down the procurement financing company route does not have to be expensive - occasionally it can even be cost-neutral.

What is NORD/LB´s involvement in procurement financing?

Dennis Koopmann: NORD/LB refinances small to medium-sized procurement financing companies and supplies them with the necessary liquidity - similarly to leasing where we have great expertise in refinancing.

Alexander Reil: There are some companies in the market that have established themselves in the finetrading sector. They compete with classic overdraft facilities, which customers otherwise usually use to pre-finance their purchases. We see huge potential in this area and we would really like to get further involved.

Why won’t the Bank acquire procurement financing outright?

Dennis Koopmann: Procurement financing companies, unlike a bank, are specialised in the business as such . They analyse an underlying transaction right down to the smallest detail, starting from the purchase order and including the confirmation of the order as well as the supply chain all the way down to the acceptance of the goods and quality control. If the underlying transaction involves, for example, 100,000 metal plates to be used for the manufacture of a component for a machine, for the Bank it would be difficult to accurately assess this transaction. By contrast, a procurement financing company knows with regard to the assumed metal plates that it buys where these are located - and in case of doubt how they can be disposed of should the customer not be able to pay after all. In short, a procurement financing company, unlike a bank, would know what to do with the product.

Alexander Reil: A procurement financing company has the requisite capacities and experience. The transport routes and costs indeed also have to be taken into account. Perhaps the goods have to be put into interim storage. These are all issues for which you need personnel and experience.

How does the refinancing proceed on the NORD/LB side?

Dennis Koopmann: The procurement financing company presents the transaction to us and we check the credit rating of the company. Normally, the underlying transaction, as the collateral, will be covered by trade credit insurance. Once everything has been documented we pay out the amount to the procurement financing company as refinancing.

Does the refinancing of procurement financing companies constitute a new area of activity for NORD/LB?

Alexander Reil: Yes, it is a relatively new offering to our customers. We got talking to a customer and realised that this business is related to the areas of factoring and leasing where we are anyway very active in refinancing. In the last few years, various new companies have appeared in the market and NORD/LB would be pleased to talk to them about refinancing. In Germany, we have an annual purchasing volume of around Euro 1.65 trillion - that’s a huge market. As a provider of specialised financing, we would really like to become increasingly involved in the refinancing.