A brief introduction of the Basel requirements is outlined. Following a definition and distinguishment of fine trading, factoring and reverse. Advantages and disadvantages are being explained as well. Finally, the influences on the balance sheet of the involved parties and on working capital are investigated.
Ten years ago, from 2007 to 2011 the global financial and the euro crisis have caused a peak in bankruptcies of many companies and even states have experienced financial difficulties. Since 2011, the total number of companies’ bankruptcies declines. In 2016, there were 21,518 insolvencies of companies in Germany. In contrast to this, in 2010, at the peak of the crisis there were 32,687 insolvencies. Overall, most of the companies in Germany are small and medium-sized enterprises (SME). In 2014, they represented 99.3 percent of all companies in Germany.
A proper working capital management is essential for all companies. Especially, SME are otherwise threatened to lack of liquidity or risk to become insolvent. Company funding has experienced profound changes lately. Basel I-III have extensively changed the regulatory circumstances for banks and their granting of credits. Banks must comply with changed regulatory capital and liquidity requirements as well as with new debt caps. This has a strong influence on company funding.
Therefore, the rating of a firm and the risk of an investment will increase the price of the company funding. The changed importance of working capital management and the new regulatory requirements have altered companies’ financing possibilities and partners. Moreover, the financial crisis has revealed their dependency on certain bankrollers.
Thus, other methods of financing suchlike factoring, fine trading, leasing and crowdfunding increased their importance. This paper examines fine trading and factoring regarding their differences, advantages, disadvantages and the methods’ influence on the balance sheet.
Table of Contents
1 Introduction
2 Reasons for new company funding methods
2.1 Implications of the Basel accords
2.2 Importance of working capital management
3 Finetrading and factoring – methods of company funding
3.1 Finetrading
3.2 Factoring
3.3 Reverse factoring
4 Finetrading and factoring – pros, cons and consequences
4.1 Pros and cons of finetrading and factoring
4.2 Consequences for the working capital and the balance sheet
5 Conclusion
Objectives and Topics
This paper examines alternative corporate financing methods—specifically finetrading and factoring—in response to the shifting regulatory landscape established by the Basel accords and the growing strategic importance of working capital management for Small and Medium-sized Enterprises (SME).
- The impact of Basel I-III regulations on bank lending and SME financing.
- Strategic optimization of working capital and the cash conversion cycle.
- Comparative analysis of finetrading, factoring, and reverse factoring.
- Benefits and drawbacks of alternative funding methods for suppliers and buyers.
- Balance sheet effects and liquidity improvements through alternative financing.
Excerpt from the Book
3.1 Finetrading
Finetrading is a method, which can be used to finance sales or purchases. It is a commercial transaction and can be defined as a drop-shipping transaction. The Banking Act does not affect Finetraders, therefore they are not supervised by the Federal Financial Supervisory Authority. The main goals are extending the date of payment, decreasing the capital lockup and receiving cash discounts for prompt payments. A trade intermediary (the finetrading association) offers a drop-shipping transaction, where the finetrader pre-finances the purchases of goods of a customer (customer of the drop-shipping). The finetrader grants an extended and flexible period of payment for which he demands a deferral and keeps the cash discount for prompt payment. Besides the deferral, an additional charge is payable, which depends on the frame agreement and the limit. Figure 2 depicts the relation between supplier, buyer and finetrader.
The customer/debtor and the finetrader arrange a frame agreement, which enables the debtor to pre-finance several purchases from different suppliers up to an agreed limit. The suppliers are not included within the frame agreement. A credit check of the debtor is performed, which includes commercial credit insurance. The maximum insurability is the maximum finetrading limit.
Summary of Chapters
1 Introduction: Provides an overview of the economic context, specifically the rise in insolvencies and the changing requirements for bank financing under Basel I-III.
2 Reasons for new company funding methods: Discusses the transition from traditional bank-led financing to alternative methods driven by regulatory pressure and the need for optimized working capital.
3 Finetrading and factoring – methods of company funding: Defines the core mechanisms, procedures, and institutional frameworks of finetrading, factoring, and reverse factoring.
4 Finetrading and factoring – pros, cons and consequences: Evaluates the practical advantages and disadvantages of these methods and their specific impact on corporate balance sheets and liquidity.
5 Conclusion: Summarizes the findings, noting the complementary nature of these funding methods and their growing importance for German SME in a changing financial environment.
Keywords
Finetrading, Factoring, Reverse Factoring, Working Capital, Cash Conversion Cycle, Basel Accords, SME, Liquidity, Company Funding, Balance Sheet, Insolvency, Debt Capital, Trade Credit, Financial Management, Credit Risk
Frequently Asked Questions
What is the fundamental focus of this paper?
The paper focuses on identifying and analyzing alternative financing methods, namely finetrading and factoring, which help companies navigate the constraints imposed by banking regulations and enhance their financial stability.
What are the central thematic fields?
The central fields include corporate finance, regulatory banking requirements (Basel I-III), working capital management, and the comparative analysis of alternative funding instruments for businesses.
What is the primary objective of the research?
The primary goal is to examine the differences, advantages, and disadvantages of finetrading and factoring and to assess their specific influence on a company's balance sheet and liquidity.
Which scientific methodology is employed?
The work utilizes a descriptive, analytical approach based on literature research, examining financial reports, industry surveys, and existing regulatory frameworks to compare financial instruments.
What is covered in the main body of the text?
The main body details the evolution of company funding, provides precise definitions of financial methods, and explores their operational impact on cash conversion cycles and balance sheet structure.
Which keywords characterize this work?
The core keywords include Finetrading, Factoring, Working Capital, Liquidity, Basel Accords, and SME, reflecting the intersection of regulatory compliance and corporate financial strategy.
How does finetrading differ from traditional bank loans?
Unlike bank loans, finetrading functions as a drop-shipping transaction that is not subject to the same oversight under the Banking Act, offering more flexibility in payment terms.
Why is the cash conversion cycle significant for SME?
The cash conversion cycle is critical because it measures the time between paying for raw materials and receiving cash from sales; shortening this cycle is essential to ensure continuous liquidity and avoid insolvency.
- Quote paper
- Florian Beyer (Author), 2017, Fine trading and factoring. Methods of company funding, Munich, GRIN Verlag, https://www.grin.com/document/536592
