Small suppliers get cash to keep their operations running by selling their invoices to businesses that collect on the bills when they come due
Investors are profiting from an age-old tension between companies and their suppliers—the length of time it takes for bills to get paid.
U.S. pension funds, private-equity firms and other investors are plowing capital into a short-term financing business that was historically dominated by large banks, helping to transform a market that greases the wheels of cross-border trade.
The business is known as trade finance, or factoring. In recent years a group of independent financing platforms have sprung up to provide cash advances to small businesses around the world that supply goods to multinational companies. With funding from private investors and other sources, these platforms buy customer invoices from those businesses and collect on the bills when they come due, reaping a profit in the process.
“Banks are pulling out and private capital is moving in,” said Carlos Mendez, co-founder of Crayhill Capital Management LP, a New York asset-management firm whose investors include pension funds, insurance firms and sovereign-wealth funds. Crayhill helps provide funding to a trade-finance company called Stenn International Ltd., which purchases invoices from businesses in Asia and South America that supply apparel, electronic goods and other products to U.S. retailers and other multinational firms.
Many large companies have payment terms that allow them to take months to pay their invoices. The 1,000 largest public companies in the U.S. took an average of 56.7 days to pay their bills last year, according to a study from consulting firm the Hackett Group Inc., up from 53.3 in 2016. That was the longest average payment term in the past decade, according to the study. In recent years, companies from consumer-products giant Procter & Gamble Co. to underwear maker Hanesbrands Inc., and tools manufacturer Stanley Black & Decker Inc. have increased the time they take to pay their global vendors.
Paying their bills later allows companies to hold on to their cash for longer and use it to help fund things like capital investments or stock buybacks. But it means suppliers—many of which are small companies that don’t have much leverage to demand faster payment from big customers—have to wait a long time to get paid for their goods. Large companies have little interest in seeing their suppliers struggle financially, so both sides are increasingly turning to trade-financing arrangements.
By selling their invoices to factoring companies, small businesses that banks often view as riskier borrowers can get cash to keep their operations running. The firms are in turn exposed to the lower credit risk of big companies, who are responsible for paying the invoices.
The global market for trade finance is estimated at about $10 trillion, according to the International Chamber of Commerce, a Paris-based business organization. This type of financing was once the exclusive purview of banks like Citibank, HSBC and Standard Chartered Bank, who regarded the activity as a way to build deeper relationships with their large corporate clients and earn small but steady returns.
Over the past decade, however, stricter banking regulations world-wide have forced banks to set aside more regulatory capital against these types of loans, making them less lucrative. Some global banks have retreated from the trade-financing business, and institutional investors are increasingly stepping in to fill the void.
John Ahearn, global head of trade finance at Citibank, said higher capital charges are encouraging Citi to look for ways to distribute more of its receivables business to institutional investors who want to reap higher returns. “We’d like to diversify the investor base,” he said, noting that roughly 5% of its loans now go to such investors.
Stenn, which is based in the U.K., on Wednesday said it is getting a $500 million credit facility from French corporate and investment bank Natixis SA that comes with insurance from American International Group Inc. The funds will be used to expand Stenn’s business of providing cash to mostly smaller suppliers, who have average outstanding invoices of $70,000 to $100,000. Crayhill, the New York investment firm, earlier provided a $300 million financing facility to Stenn and helped the firm secure the additional credit line.
Stenn pays an average of 99 cents on the dollar for receipts due within 30 to 60 days, meaning it is charging the suppliers between 6% to 12% annual percentage rates, said Crayhill’s Mr. Mendez. Much of that return ends up going to investors, who earn yields that are higher than other types of short-term debt investments. According to Federal Reserve data, nonfinancial corporate debt maturing in 60 dayscarried annualized rates of 2.02% as of July 23.
In the latest deal, AIG will insure Natixis against nonpayment of the invoices purchased by the firm in exchange for a fee. That reduces the lending risk for Natixis and the amount of capital the French bank needs to set aside for its credit line to Stenn, said people familiar with the transaction.
Investors, for their part, are exposing themselves to a global trade environment that is growing more volatile. But Kerstin Braun, Stenn’s president, said increasing protectionism won’t shrink the market even if it changes trade flows. “Trade will not stop,” she said. “The goods are there, the suppliers are there. [Protectionism] may redirect global trade, but not stop it.”
—Jon Emont contributed to this article.