1. undertake to finance or otherwise support or guarantee (something).
The second step in the trade finance funding process is Underwriting. It is during this step of the trade finance transaction that a funder determines what pricing and terms are commensurate with transaction risk in order to insure itself an acceptable return.
The level of risk in Trade Finance transactions has proven to be consistently low through various stages of the economic cycle.
“Yet even in crisis conditions it seems that trade finance claims have been relatively safe and liquid assets, themselves posing only limited risks to banks and overall financial stability. "(1)
Current loss rates continue to be low.
“Data from the ICC trade register suggest that default and loss rates for traditional trade finance products are very low, at least for the largest banks. The average default rate per transaction across short-term trade finance products covering transactions during 2008–11 is 0.02%, while the average loss rate is 0.01%. “(1)
The typical term and quality of the underlying assets tend to support these low loss rates.
“The ability to reduce trade finance exposures most likely reflects their short maturity, relatively small size and the linkage between trade finance loans and underlying real transactions, which provide the means for repayment on maturity.”(1)
Critical to the expansion of capital deployment to the mid-market is fast and efficient underwriting of amounts between $1M USD and $50M USD. (Think minutes, hours, not Weeks!) Funders like Kabbage, Fundbox, or Bluevine can typically underwrite quickly, but their methods of underwriting have many industry funders skeptical they can manage risk effectively at larger transaction sizes or through adverse economic conditions.
As we discussed in our last blog, automating and increasing the efficiency of Origination of Trade Finance opportunities is, in and of itself, ineffective without also scaling the throughput of the underwriting process.
“We are stepping into the shoes of banks, and for that you need scale,” said Max Mitchell, head of direct lending at Intermediate Capital Group, which manages €15.5 billion ($17 billion) of direct-lending assets around the world. (2)
The amount of capital available to fund transactions so far has outpaced the ability to deploy it effectively.
“ There is so much cash pouring in that the asset managers can’t always invest it. In May, there was $62 billion idling in these funds, according to Preqin, when a decade ago it was $12 billion.”(2)
… analysts say that despite the new money there are still many opportunities in direct lending, because there is demand from the companies that banks aren’t lending to but are too small to tap public markets. (2)
So how long does it take your organization to underwrite a $3-5M Working Capital transaction?
Demand for trade and working capital finance remains strong. With an average .02% loss rate and an abundance of capital ready to be deployed in the market your competitors are likely working to develop real-time or near real-time methods to underwrite this demand. Many organizations including TradeRocket are already far along in presenting solutions to the marketplace.
Funders must begin to combine automated Origination and Servicing with automated Underwriting to grow and/or maintain market share.
Keep yourself informed on the continuing transformation of the working capital finance industry brought about by the development of new automation and technology. If you are a Funder targeting deal sizes of $1M to $50M USD (equivalent) either in the US or abroad and are looking for a better, faster, cheaper way to acquire and retain clients, give us a call. Albert Assad, VP of Business Development (firstname.lastname@example.org or 404-800-5766), can’t wait to tell you about what we’ve got.
(1) Committee on the Global Financial System, CGFS Papers No 50, Trade finance: developments and issues.
(2) The Wall Street Journal, “Investors Play the Risky Role of Lender”, June 15,2017