The ‘old style’ Lending Model v the Convertibill® Purchasing Model
History of Banking
For thousands of years banks and merchants have been lending to businesses. Their model is to lend and to get paid back with interest over time. Banks were carefully managed by conservative lenders who avoided bad debt by selecting responsible business borrowers. Originally, their relationship was more akin to a partnership built on mature experience and mutual trust. As banks increased in size, the relationship became more detached and less personal. Rules replaced relationships and bad debt became an accepted part of lending that is managed by credit committees.
As recently as the late 1990s, the local bank manager still maintained a personal relationship with business borrowers. Over time, centralisation slowly eroded the function of the branch manager. Computerisation and advances in technology further distanced the relationship between the business borrower and the lender. So much so that today, ‘dealing with the bank’ has become shrouded in bureaucracy and secrecy that has frustrated the lending process beyond recognition.
The blame does not lie solely with advances in technology and natural progression, regulatory control has also added to the confusion. Until the most recent banking crisis, lenders were still largely autonomous. The ever-increasing regulatory control has strangled age old lending models and forced lenders to further change how they conduct business. Reserving, provisioning, distribution and regulatory requirements for the spread of risk, although well intentioned, have all but destroyed the ability of lenders to lend. The biggest sufferer of all of this has been the micro-medium sized business borrower.
Cost of Lending
Given all of the above, in today’s market the cost of lending more than EUR 50.0k to a company, is almost the same as the cost of lending them EUR 0.75m. Therefore, lending in the EUR 50.0 – 750.0k ‘space’ is undesirable. Where loans of EUR 50.0k can be approved quickly and are protected by a personal guarantee, larger amounts are problematic. This is true until the EUR 0.75m+ level is reached. At this level, the effort of processing, supervising and administering the loan becomes profitable for the bank. The risk management versus reward dynamic makes good lending sense too. Ultimately, lending into the EUR 50.0 – 750.0k space continues to suffer significantly.
Nonetheless, business owners in the EUR 50.0 – 750.0k space still need finance in order to prosper and grow. Lenders try to facilitate this by offering Invoice Discounting or Factoring [IDF]. IDF solves a bank’s regulatory and risk requirements but doesn’t really suit the needs of the business borrower. IDF is an ‘all or nothing’ lending product in that the borrower must assign all the ‘book debts’ of the company to the lender. In so doing, every invoice, no matter how small or large, must be processed ‘through the lender’. Considering the Pareto 80:20 rule that 80.00% of an organisation’s cash comes from 20.00% of its customers, processing large amounts of small, or cash paying accounts is administratively intensive and highly inefficient.
In a ‘needs must’ scenario the business borrower will sign a tightly written IDF contract and a personal guarantee too. These are required so that the lender can manage its risk exposure and regulatory requirements. Once the IDF facility begins to operate, the business owner slowly sees the impact it has on operations and the day-to-day administration ‘headache’ for the business. Also, a credit limit is applied to the account and this limits the business’ ability to grow.
Regardless of the size of a company’s credit facility, whenever they try to grow their business, they need to apply for a new credit limit increase. If it is not granted, a stalemate occurs. In many cases, the tightly written loan contract can only be cancelled if hefty exit fees are paid. The same contract may also make it unfavourable for other lenders to offer an additional facility because their second-tier security is inadequate. Taking all this into consideration, borrowing can leave many companies in the untenable position of being unable to grow because they are unable to quickly change lenders.
Convertibill® created Credebt® (pronounced: Credit) to specifically address all of these lending issues in a new and easy to use finance model. Rather than emulate flawed lending practices, it focused on the fact that every day businesses conduct trade. Using a buying and selling, or purchasing model called Credebt®, Convertibill® systematically breaks down all of the above lending obstacles. After seven years of perfecting its Credebt® model, it then created the Convertibill® Branch Network to ensure its products would be delivered nationwide.
Convertibill® Credebt® (pronounced: Credit) facilities rarely require liens or personal guarantees. Its contract is also free of restrictive ‘lock-ins’ so that the business owner can leave at will. The purchasing model also means that, in most cases, its products can be used alongside an existing loan facility. Equally importantly, Convertibill® doesn’t apply credit limits because it looks at the company’s customers rather than its balance sheet. Any well managed business with reliable customers can use Convertibill® Finance. The buying and selling, or purchasing model, integrates seamlessly with the day-to-day administration.
As a result, users of the Convertibill® Customer Finance purchasing model selectively choose what customers they wish to trade. As their order books grow, so does their overall facility. When combined with Convertibill® Order Finance, funding new orders is also possible. With Convertibill® Supplier Finance, business owners can also convert revenue streams into immediate cash to fund other parts of their business. And finally, if the business owner sells plant, machinery or other capital equipment, Convertibill® Sales Finance can provide funding to their customers in the form of lease finance that is repaid by instalments.
As a final note, Convertibill® Finance is flexible. In most cases, combinations of the four main products can be used to solve most business funding requirements. However you decide to use Convertibill®, talk to your Local Branch Manager, or Specialist, today and see how we can help your business prosper and grow.
Making the difference to 1,000s of companies across Ireland