Thought Leadership: Follow the Customer

Whether we realize it or not, Relationship Lending has driven innovation in asset-based lending since its inception. Given that the ABL industry is not known for innovation, it is perhaps a little surprising to see how far the market has progressed from the early days of factoring in the ‘60s through the introduction of confidential invoice discounting in the late ‘70s and the development of a fully blown ABL offering in the mid-90s, albeit by less than a handful of players. The innovation driven in the industry has originated from following the client — the unusual or different requests that eventually become the norm. Independent lenders like IGF thrive in this area; it stems from creative underwriting and personal client management. Today it has come to be known as Relationship Lending.

Banks and large multinationals do not understand their clients, their journey and the management team intimately in the same way as independent lenders and so rely on their lower pricing to compensate for the lower quantum offered. That may have worked in the past, but the need for Relationship Lending and unique solutions will leave them out of step as we escape COVID-19’s long shadow.

Why is Relationship Lending Important?

Jeff Bezos says, “Follow the customer and they’ll do the rest.” In other words, even when you opt not to pursue a particular prospect, you learn much about the customer’s business model and the broader market they’re operating in by ‘mastering your brief’ as it has come to be known. By keeping your ear to the ground and monitoring your clients’ markets, you can highlight subtle changes in their sector which can then be applied to your own market intelligence. It is only with a personal approach and a commitment to understanding each opportunity that you can master the nuanced differences deriving from each one.

Relationship Lending is not simply something to be parroted as a useful marketing tool — you must show you are willing to support clients through thick and thin. After all, growth is not always a straight line. That is why at the outbreak of the pandemic in March 2020, IGF made the decision to extend the recourse period by a calendar month for all Invoice Finance clients. Taking the time to have those hard conversations with our clients revealed potential issues with debt collection as liquidity began to dry up across the economy. By supporting clients throughout the credit cycle and implementing unique solutions, UK Finance reported that IGF maintained the lowest attrition in the UK ABL industry in 2020.

Commitment to Relationship Lending means the hard work isn’t done once the client joins your portfolio. It is about investing both as an institution and as a person. From the Business Development Director through to the Client Manager, you need to buy into the journey of your client, otherwise what really differentiates you from larger lenders? Independent lenders exist to serve the areas banks either can’t or won’t cater for. Having a single point of contact, typically your Client Manager, means clients are not bumped around different departments when their needs change. An IGF Client Manager understands how their client’s business works and works with them through good and bad to ensure the client is best placed for whatever opportunity may present themselves. It is common practice and even encouraged to have Client Managers make a case on behalf of their client to senior management or the credit team, as we expect them to know their client better than anyone else — it is this constructive process which means the bespoke facility crafting doesn’t end with underwriting.

Why Now?

Unless you refuse to have communication with the outside world, it is impossible to escape news of supply chain issues across the globe, particularly with the dramatic rise in the cost of oil and gas. Recent delays in the supply chain have re-raised issues of the early pandemic such as extending recourse periods. However, more often than not, it results in working with the client to review their suppliers, the payment terms and often their place within the supply chain. For this reason, the streamlining of business operations has come to the fore and, given the nature of Invoice Finance, working together with your client is essential to ensuring they are still receiving the appropriate funding for their goals. The self-reflection spurred by supply-chain issues, COVID-19 and tightening of margins is leading to consolidation across many industries, with high-profile industries such as Commercial Aviation with EasyJet and Wizzair’s to and thro and Retailers with the acquisition of Supersol in Spain by Carrefour, a French supermarket, leading the way.

With the swathe of deal-making on the horizon, Relationship Lending once again comes to the fore. The need to understand the context of the deal and your client’s place in the market are essential to building a plan going forward. To simply view the deal in isolation, as many larger funders will, results in missed opportunities and higher execution risk for the client. Buy & Build works fantastically well and epitomizes ABL at its best — understanding the plan, being supportive, the ability to react to opportunities when they come along and even saying no on occasion. The use of cash flow loans in conjunction with this strategy enables owners to hold onto equity for longer, enabling ABL to access new opportunities that would otherwise be withheld. The pandemic has shown the potential downside of keeping personal capital in the company rather than taking money out of the business when the opportunity arises. At IGF, we are seeing many longtime business owners now seeking to diversify their wealth by cashing in on their long-held shares in the business through equity releases. Once more, Relationship Lending demonstrates its value, as the transaction often involves numerous stakeholders whom the lender works with, such as the management team, the owner and potential outside investors. Understanding the operation of the business and the roles played by each stakeholder helps build trust through the process, particularly when it involves deferred payments tied to company performance.

Where Will Clients Lead the Industry in the Future?

This willingness to follow the customer comes from the fascination of meeting and financing entrepreneurs. With that in mind, one’s mind turns toward the future of Relationship Lending and that of ABL. Naturally, whatever form the future takes, it will be parallel to that of our clients and therefore unique to each relationship. There are, however, a number of industry-wide developments on the horizon; some a natural progression of existing trends and others will be innovations which could challenge the core beliefs of the industry:

• Coalescence of UK and US markets: There are benefits from both sides of the pond’s approach to ABL which the other does not currently utilize. For the US, inventory stand-alone facilities are commonplace, whereas in the UK, any inventory line will typically be funded in conjunction with another asset. For the UK, holding cash dominion over the debts of clients ensures greater ability to fund other assets and to a higher advance rate with greater certainty.
• Blockchain: Known as ‘Distributed Ledger Technology,’ blockchain could be used to verify ledgers from all parties automatically without the need to compare the lenders ledger on file and that of the client while automatically confirming with the debtors the state of their balance on the ledger. This has great potential to significantly reduce the workload required for the day-to-day management of an Invoice Finance facility. While this technology is some way off, in 2017, the UK government published a research paper on the technology and it has since come to be used in innovative fringes of the finance industry, such as those familiar with blockchain technology through cryptocurrency. Although it will be many years before it becomes mainstream, if at all, this has the potential to enhance the ease with which clients can manage their facility. However, we must bear in mind the implications this shift may have on the human element of Relationship Lending and therefore consider whether this technology will create a void for Relationship Lending to fill.

The mention of technology powered ABL naturally leads the conversation to Lendtech companies. They show how there is a space for automating aspects of leveraged finance, but they have yet to master the Relationship Lending aspect of the business, making comprehensive ABL beyond their reach. They are well-placed for simple term-loans, but they quickly find themselves out of their depth without the expertise and relationship of independent lenders.

Conclusion

‘Taking a view’ on certain aspects of clients was once the exception, but increasingly, it appears to be the norm, as very few businesses came out of the last 18 months unscathed. Considering that, it is doubtful that Apple will approach IGF anytime soon for a loan. It is then a fair assumption that most prospects we come across will have some COVID-19-pandemic-related issue that would have deterred many lenders once upon time. In order to support Lower-Mid Market companies and help them thrive as they begin their recovery, it is essential they can access as much capital as they require. Knowing your client is key and although no one will ever understand the client’s business as well as they do, we work hard to come next.

About IGF and the Authors

IGF is an independent ABL house majority owned by Spring Ventures, a family office, providing growth finance to the Lower Middle Market in the UK. Products include Accounts Receivable, Inventory, Plant & Machinery, Real Estate and Unsecured Strips. Current deal appetite ranges from $1 million up to $20 million. Business is originated from a range of introducers, including corporate finance, accountants, private equity and industry brokers.

Michael Fletcher is the Commercial Director at IGF. He was previously the Head of Portfolio at IGF and has been with the company for over five years. Previous employment includes Shawbrook Bank and Centric Commercial Finance.

Robert Onslow is Associate ABL Director within the commercial team and coordinates North American Partnerships. He was previously Client Manager at IGF and worked at the House of Parliament prior to IGF.