Post-war development of new forms of financing

The structure of a (network of) local Financing Companies using “The ABPaymentflows © Financing Concept” connects technically and historically to a development towards asset based financing that has been evolving since the war. Originally financing activities of banks were standard unsecured as the legal and informational framework was near absent and/or not yet as sophisticated. The risks of trade finance were mitigated by following very carefully the activities of commercial companies. Following the development of an adequate legal framework mortgage based finance thrived and a separate financing market came into existence. Leasing of cars and machinery followed after its separate asset status was unambiguously secured by relevant regulation between ownership and use of (capital) goods. Since such goods do not allow for a mortgage base, another structure was found in order that financing could be viewed as “Asset-based” all the same. Deep knowledge of the second hand market and a focus on spreading risks (on a statistical basis) lead to a factual asset base and the possibility of attractive pricing of financing. A not specialized party (e.g. a universal bank) is unable to perform such task. On their turn specialist parties engaging in specialized finance may be funded by universal banks, as is the case in many instances. In short The IHF-credit © finds its rationale of existence on the same basis as what happened with other fundable assets since the war: thanks to automation and new insights the business model of ABPaymentflows © leads to, in financing terms, a relevant new asset base on the SME’s balance sheet.

Breakthroughs & intended purpose

For the company (SME):

• The creditworthiness of the company increases as loans are extended on the basis of a tangible asset collateral. The conversion of an existing bank overdraft in a IHF-credit © account facilitates an increase of the debt position of the SME with the financier whilst at the same time improving its debt coverage position;

For the Financier:

• The management and processing costs are relatively low through a maximum of automation of the delivery of the relevant data of the company on a STP basis (“Straight Trough Processing”);
• The asset base on the one hand and 1) real-time monitoring, 2) automated state of the art risk measurement on the other hand, ground-breakingly reduce the financing risk for the financier;
• The risk class of the IHF-credit © is low given the SME segment that is financed, allowing for an attractive factoring rate / pre-financing percentage for the company. This allows both parties to be satisfied with the risk/return ratio of the IHF-credit.

Structure of the IHF-credit ©

The IHF-credit © uses as the object of financing the relevant data from the invoices that are at the basis of its debtor position, the accounts receivable of the company. These data come directly from the administration records of the SME on a STP basis (i.e. fully automatically).

A link to this data is automatically made available to the Financier and introduced into the administrative system of the Financier; The Financier will pre-finance the SME on the basis of the receivables and invoices that are inserted into the administrative system of the Financier; The SME holds the account into which receivables will be paid and funds accumulated with the Financier. The Financier has an exclusive management, distribution and payment authorization on that account of the SME as part of the loan agreement between the Financier and SME; The data relating to invoices sent out by the SME and the payment flows connected with the invoices are made available automatically.

The information flows through an independent data-traffic control tower and is insightful enhanced. The entire data flow is connected to the administration of the SME and the Financier; hence the creation of the required Asset Base that makes pre-financing possible.

The data flow and its continuous operation is facilitated through the working of an ICT application and is linked to the company’s and Financier’s administrative systems. The entire structure is laid down in a Service Level Agreement (SLA) that complies with and meets the requirements of the Financier.

The SME enters into a separate agreement with the “Invoicing Facilitator”, the company that manages and monitors hands-on its invoices. This information is important for the credit assessment process on a continuous basis.

Services to the SME

The SME is equipped with SaaS services and prepares for a loan application that is managed by the local Financing Vehicle ; The data generated in the SaaS application have the effect that the invoices and debtors of the SME “get value” as they will form a tangible asset base. The creditworthiness of any SME will increase as a consequence.

This facilitates the local Financing Vehicle in realizing the IHF-credit © on behalf of the SME and the Financier. The local Financing Vehicle is also manager of the loan and will be using the comprehensive information on a regular basis according to an automated protocol that facilitates reporting to the Financier on the state of affairs of the SME with regard to the loan. Advanced information can be distilled from the data generated in the SaaS application with regard to individual invoices and accounts receivable. These data can be used by any SME to optimize their accounts receivable and invoice management.

Services to the Financier

The structure renders the IHF-credit © available for a wide range of small businesses and hence small loans in a variety of product – market combinations. Similar financing was previously only accessible to a select group of large enterprises due to the prohibitive cost of application and management for small loans. In this context it is a main characteristic of the IHF-credit © with regard to the Financier that no application fee applies and that very low operating costs apply for relatively small companies. The continuous IHF-credit © management by the local Financing Vehicle, and hence the measurement of credit risk on behalf of the Financier is possible through specific information from the independent data-traffic control tower. The same information allows the company to optimize its accounts receivables management.