Where Money Moves Like Molasses: Lending to The Advertising Media Space

In 2017, Greenwich Associates published a white paper entitled “Trade Finance: A Market Eager for Disruption,” which made the case that while technology is a primary driver of disruption in the space, companies are also experimenting with alternative nonbank providers in various parts of the trade finance value chain.

Advertising media is an increasingly complex ecosystem and money moves though it slowly. As of 2020, approximately 7,000 ad tech companies exist in North America alone. In 2018, eMarketer reported that payment terms of 90 days were increasingly common. Further, at that time, outliers reported terms stretching beyond 120 days. According to Moody’s, most companies in their Media and Publishing Sector coverage carry debt rated speculative.

The Inadequacies of Status Quo Strategies and Tactics

An A/R secured LOC used to cover extended payment gaps of 90 days or more, will in most cases eventually be inadequate. Depending on credit worthiness, the LOC against A/R will generally carry a debt to income ratio of 25% to 40% — a rate that carries little cushion, especially if other financing needs come into play. As a reference: Diageo is known to use payment terms of 120 days. Starbucks is known for 100-day terms. Coty once famously asked for 180-day payment terms when shopping for an agency to handle its $1 billion media account.

Realistically, at some point that A/R secured line of credit will be inadequate and exhausted. At this point, factoring becomes the next most attractive tactic to facilitate liquidity. With a timeline of 30 days to fund — sometimes less than a week — factoring presents as a practical solution. Cost of capital related to factoring is variable, and it can rise dramatically over short periods of time. Another consideration is the fact that what brought a company to this tactic is a negative credit event — an exhausted line of credit — which will likely increase the cost of capital. And cost of capital is further driven up by long payment terms, 90-days brings exorbitant rates and invoices beyond 90 days are often classified as uncollectible, even if the obligator is Starbucks.

For larger companies, commercial paper becomes a prescient option. However, it is not easy to write CP in the advertising media space. For example, prior to merging with CBS, Viacom, with $12.8 billion in revenue and a credit rating of Baa3, had no commercial paper on the street. Does this mean Viacom was a candidate for factoring? Probably not. Certainly, Viacom had access to liquidity, just likely at a higher cost than might be readily assumed.

Imagining Better — Alternative Facilities and Innovative Solutions

Recognizing that a significant portion of the $700 billion flowing through the advertising ecosystem originates at companies with investment-grade credit, such as Starbucks, Diageo and Coty, another opportunity to innovate new kinds of financing tools better suited to the needs of the players in the space exists. Factoring generally doesn’t recognize accounts receivable outside of 90-day terms, severely handicapping its utility in the space, without even considering the cost of capital.

For a CFO, choosing the right approach at the right time is critical. But more importantly, they must be aware of all the options at their disposal and think more than one step ahead.