Finetrading

Process flow in finetrading

Legal triangular relationship in finetrading

Finetrading is a bank-independent financial service that is used to finance operating current assets . The finetrader acts as a middleman or intermediary between supplier and buyer and finances the negotiated order in advance. As part of the negotiation for the goods order, the finetrader intervenes as the new debtor of the supplier and pays the supplier's invoice to the buyer immediately after the goods have been delivered. At the same time, the finetrader grants the goods buyer an extended payment term of 120 days. The supplier can immediately utilize the direct inflow of liquidity for business purposes, while the finetrading user gains time until final payment. For the use of finetrading, the finetrader charges individual fees, so-called deferral fees, which depend in particular on the creditworthiness and the duration of use. They mostly consist of the negotiated discount and deferral fees for the exact day. During this time of trading, the finetrader ensures the security of the transaction by taking out trade credit insurance. Apparently similar to reverse factoring, there are nevertheless serious differences that are shown in the section Differentiating from factoring .

Definition and background

Finetrading is a service that enables companies that require goods or raw materials for their production or the provision of services to outsource their purchasing professionally. The service provider (finetrader) acts on the one hand as a middleman because he purchases the goods at the behest of the buyer and on the other hand as a financier because he pre-finances this trade until the buyer pays him. Assets that are only capitalized on the balance sheet for a short period of time ( current assets ), i.e. goods, raw materials, consumables and supplies or finished / unfinished goods, are primarily financed . Finetrading is a fantasy word composed of the English words "finance" and "trade". The gerund emphasizes the activity between the contracting parties, namely “doing business”. Because the finetrader enters the existing business relationship (supplier - buyer) as a third party and enables the transaction of the tradable goods through his function.

Finetrading process

After the buyer and the middleman have agreed on the use of finetrading in the purchasing process, a framework agreement is concluded between both parties. Furthermore, the finetrader checks the creditworthiness documents of the buyer and concludes a trade credit insurance mostly at his own expense. The actual six-stage finetrading process (see sketch) can then begin, which can vary depending on the provider, but usually proceeds as follows:

The buyer negotiates the conditions with his supplier and orders the goods after consulting the finetrader
The supplier delivers the ordered goods directly to the buyer
The supplier issues an invoice to the finetrader for this
The finetrader pays the invoice within the agreed period
The finetrader in turn issues the buyer an invoice for the delivery of goods with a payment term of 120 days
The customer pays the invoice flexibly within this period

Possible uses

Against the background of Basel II and Basel III , it is becoming increasingly difficult for companies to obtain credit. Therefore, alternative, i.e. bank-independent, financing tools are gaining in importance in medium-sized companies. The purchase financing can usually be used from an annual volume of at least € 100,000; larger shopping lines are in the low double-digit million range. The instrument is aimed at both small and medium-sized businesses. It is customary that the purchasing lines can be used on a revolving basis during the year, i. H. after repayment, the financing line can be used again. The purposes of use are broadly diversified, but are particularly effective where companies have flexibility deficits in the economic cycle:

Companies with seasonal business can use finetrading to better offset peaks. In this way, the required volume can be ordered in advance without putting too much pressure on your own liquid funds.
Commodities that are traded on markets with volatile purchase prices can be strategically stored with finetrading, while the payload is distributed over the following months with revenue returns.
Companies in growth phases need a disproportionately large, fast and flexible liquidity. With finetrading, short-term orders can be pre-financed directly.
Companies that use collateral with their house banks for long-term financing can use finetrading to generate additional lines without having to provide additional collateral.
Companies that cannot obtain adequate credit insurance from suppliers can use finetrading to trigger sufficiently high order volumes.

Advantages and disadvantages of finetrading

advantages

Immediate liquidity
Extended payment term
Elimination of the risk of failure for the supplier
Improvement of key figures / cash flow / creditworthiness / rating
Relief of credit lines and collateral at banks
Extension of credit insurance

disadvantage

Implementation effort (e.g. integration into IT systems, etc.)
Higher cost compared to long-term bank loans
Limited funding volume

Finetrading costs

Individual fees are charged for the use of finetrading, which may vary depending on the provider. These are measured primarily on the basis of the type of goods, the annual purchasing volume, the order frequency, the company's creditworthiness and the actual useful life. Typically, finetrading providers do not charge interest, like banks, but fees, which thus represent additional costs and flow into the income statement for accounting purposes . A setup fee that is common in the financing sector is charged as a one-off fee. This ensures that the buyer has a purchasing line all year round. As ongoing fees, deferral fees are charged, which depend on how long the buyer needs to repay the finetrader. Typically, the fees are divided into monthly and daily cycles, which increase the longer finetrading is used.

Differentiation from alternative financing

General delimitation

Finetrading is a new method compared to the established alternatives such as factoring , leasing , mezzanine or asset-backed security . Since finetrading finances the purchase, which only enables factorable invoicing, this is the only permissible delimitation.

Differentiation from factoring

In contrast to factoring , finetrading starts one step in advance in the economic cycle. The claim that arises later is not sold to an institute, but the finetrading company takes over the financing of goods orders with which production and ultimately sales are guaranteed.

differences		Finetrading	Factoring
Structurally	Essence	Pre-financing of working capital	Purchase of accounts receivable
	Minimum volume	from 50,000 EUR	theoretically no lower limit
	Collection period	Max. 120 days	Max. 90 days
	Lead time	2 - 4 weeks	4 months
	Usage rate	flexible, entrepreneurial decision per order (1 - 100%)	Pre-defined debtors must be served without exception (100%)
Business	Balance sheet effect	Key figure optimization at the customer, balance sheet reduction at the supplier	Balance sheet shortening and thus equity ratio improvement
	Ø financing rate	100%	80-90%
	Failure protection	100%	100%
	Ø cost rate	Ø 10%	4 - 20%

Differentiation from reverse factoring

Finetrading is often confused with reverse factoring . However, the two alternative forms of financing differ structurally as well as economically and legally, as the table below shows.

differences		Finetrading	Reverse factoring
Structurally	Users	The customer is the user	The supplier is the user
	implementation	Fast implementation, as no credit check of the supplier is necessary	Long implementation, since credit checks are absolutely necessary for every supplier
	flexibility	Given because the limit can be used for any supplier; Free choice of whether purchasing is processed via finetrading	Not given, as the total limit must be divided up for each supplier beforehand and the obligation to process via factor within the limit
Business economics	Financing period	Max. Up to 120 days, repayment to the day	Max. Up to 180 days, fixed repayment
	Volumes	Even small purchasing volumes are possible (from € 100,000), aimed at SMEs	Higher purchasing volumes (from € 10 million) are more aimed at large companies
	costs	I. d. R. Capital costs at 10%	I. d. Usually cheap, as approx. 1-3% above Euribor
Legal	contract	1 contract: Framework agreement between finetrader and buyer	2 contracts: Factoring contract with the supplier and factoring contract with the buyer including counter-signature by the supplier
	property	Finetrader acquires ownership of goods	Factor acquires ownership of the claim
	BaFin	Trading business, therefore not subject to BaFin (Section 1 KWG)	Banking business, therefore subject to BaFin (§§ 2.13 GwG, § 261 StGB)

literature

Stefan Hohberger, Hellmut Damlachi: Reorganization in medium- sized companies - expanding to restrictive corporate reorganization, reorganization reports and insolvency plan , 2nd edition, Marburg 2010

Financial Gates GmbH (Ed.): Yearbook 2011 - Corporate Financing , 11th Edition, Frankfurt a. M. 2011, p. 61f.

Tatjana Anderer (Ed.): Financial Yearbook Germany 2011 , 8th edition 2011, Munich 2010, p. 99ff.

Tatjana Anderer (Ed.): Financial Yearbook Germany 2010 , 7th edition 2010, Munich 2009, p. 90ff.

Tatjana Anderer (Ed.), Michael Bormann: Financial Yearbook 2009 , 6th edition 2009, Munich 2008, p. 69

Web links