Stock finance ... fact or fiction?

As you may recall, my first newsletter covered the influence and difficulties for companies following the Brumark and Spectrum cases on bank borrowing, which continues, and promised in my next newsletter to discuss Stock Finance.

Fact or Fiction - unfortunately some of your contemporaries have tried to find stock finance for their clients from the clearing banks and found it virtually impossible; they try very hard to convince the client they don’t need it because they don’t provide it.

Why - in short, the banks perceive it as too risky and don’t have the internal expertise to run or control it. The expertise is in the independent market where two types of stock finance are available but in a limited way. A hand full of lenders do suggest they offer it as an ‘off the peg’ facility but in reality very few do.

Where is the market - there are two types of stock finance in the market;

1. as part of an Asset Based Lending (ABL) transaction, usually associated with MBO’s, MBI’s, restructuring and M & A work etc.
2. revolving stock loans combined with some sort of invoice financing facility.

As far as ABL’s are concerned a stock facility can play an important role at the outset of a deal by raising additional cash to help with headroom and/or maintaining a facility because it is required as part of an integral working capital package.

But some offer instead an over advance on the debtors, short term cash flow loans or term loans against plant and machinery or other fixed assets. Anything it would seem but stock.finance. However, there are a small number of lenders who will genuinely offer a revolving stock finance facility.

Criteria - it varies a lot from upto 50% against raw materials, providing there are no ROT issues; nothing against WIP; and from 50-70% against finished goods, less allowances for receivership costs, employee holiday pay and other bits and pieces (no allowances are now made for crown debts since the Enterprise Act).

In respect of ii. above, stock finance by itself was possible until recently. Unfortunately clearing bank debentures now make it very difficult for the stock lender; security is maintained by the lender from purchase to the sale of the goods but once it converts to a debtor, it falls under the security of the clearing bank. If the bank feel exposed for any reason they can withhold payments to the stock lender.

This actually happened recently so the stock funders now insist they also provide the ‘wash out’ with receivables finance. If the clearing bank is already providing invoice financing then it will have to be replaced with the lenders own. To move these facilities to an independent lender can only be a good way forward.

Finally - I would like to deal with a misconception; many people believe stock finance is merely the financing of finished goods whilst in a warehouse awaiting sale, this is not the case. Because how would the lender take and keep his security/charge on the product if the bank has a fixed and floating charge?

The answer - the lender must purchase the goods on behalf of his client so he has title and has an effective exit route to cash via debtors if working outside the clearing banks debenture.

To do this an additional channel of business must be set up whereby the lender actually provides a trade finance facility to fund the purchase of goods, hold it in stock (hopefully the majority of it is pre-sold) for a short time and then either fund a credit period until payment is received or provide an invoice financing facility.

This is a traditional stock finance facility which really encompasses a purchase finance issue using import or pre-shipment finance via a Letter of Credit for companies who don’t have the funds themselves.