Commodities market – historical traits are hampering progress; why?
We look at why the growth of many commodities companies is being slowed due to the structuring of their finance. Factors include cash availability, thin margins on commodities and opaque funding structures.
Many commodities traders rely on cash a lot longer than needed. We see large or relatively established traders recycling their own funds, as they have not explored the various solutions on the market. Much of this is due to distrust and perceived slow speed.
Sometimes large banks or funders are inadequate in addressing the needs of certain clients. While another funder may be more than happy to quickly amend facilities and increase limit sizes. This reason for this mismatch mainly focuses on working with the right person and understanding both the lender and borrowers requirements. This includes security, products and cycles. This is always changing.
We were recently with a large bank that told us they were financing in the way it had to be. This was simply incorrect, by understanding the way other large funders and alternative financiers may look at facilities; it is possible to explain and restructure facilities.
Due to larger companies having relatively opaque funding structures, it is not always understood how a facility should look and what funding level is appropriate. Sometimes this may be lead by new bank policy or relationship managers at banks who do not want to push the boundaries.
Sometimes the wrong facilities are used and certain elements are not known about. This is due to funders providing the wrong solutions and a business not having long-term plans in place. There may be trades that a company use their own cash for, which can fit into a facility. There may also be no pre-export finance facilities used, alternative repo structures or receivables finance wrongly utilised when an alternative structure could be more beneficial.
Security is sometimes asked for when it shouldn’t be; this can be negotiated out of and used in various ways. By providing security when not necessary, this could be disadvantageous in the long run.
It may be easy for certain companies to set up in more favourable jurisdictions or trade with alternative countries. This may be advantageous when looking at the companies’ long-term growth.
Being a burden:
The funder and client relationship should be one of partnership in growth as it is in both of their interests to make this work. It is too often thought of as a struggle where difficulty is often found.
At TFG we meet many businesses and traders in very different sectors; so are able to see varied financing structures and company security in many diverse areas and jurisdictions. What we see in the commodity sector does apply to many industries, but the reason it is so prevalent within commodities is that it is a high turnover and low margin business. Thus, the financing requirement is a lot more profound.
We are firm believers in having a specialism and can only attempt to grapple with differing products; such as the intricacies of the cooking oil market and the production cycle as well as varied delivery terms. However, as we aim to understand the finance piece; we work in partnership with a client to create a beneficial solution.