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Intercompany financing – complying with procedures
| 18-12-2017 | treasuryXL |
Many businesses (not just multinationals) finance the operations of their subsidiaries/affiliates via intercompany loans. During the financial crisis external funding became more difficult to obtain, and more businesses attempted to finance their operations internally. Whilst this can be a good procedure, consideration must be given to the fact that the loans must still be proper loans, compliant with normal market practices. Below we attempt to explain the relevant procedure.
Arm’s length principle
All terms and conditions of the intercompany loan – with special consideration for the interest rate – must be consistent with independent external loan funding. A business can not adopt a more generous approach to funding its subsidiaries than could be obtained externally. The pricing of the loan must reflect the perceived credit risk of the entity that is seeking funding.
Documentation
Just as with external financing, legal documentation needs to be drawn up and signed that clearly shows the terms and conditions of the loan. Standard covenants should be included together with a schedule showing repayment of principal and interest. If a subsidiary is granted an embedded option (early repayment without a penalty) then this must be clearly noted. Whilst the documentation does not have to be as large as that used by banks, it should always contain all relevant clauses, and both parties must adhere to the signed loan agreement. Included within the documentation should be a detailed explanation as to how the price and spread was determined, along with external data proof.
Credit modelling
As most subsidiaries are small and have no independent credit rating, an approach must be taken to attempt to define their creditworthiness. Standard metrics can be used to ascertain an internal rating. Just with a normal external loan, attention should be paid to the ability to repay. Whilst tax authorities may question the integrity of the credit modelling matrix, this can at least be negotiated if a dispute arises. If no matrix is available, then problems can occur.
Pricing
As previously stated, an internal loan should replicate the general conditions of an external loan. That means that when trying to determine the interest rate, full attention should be given to the funding costs of the main company. They need to determine what price they would pay externally to fund the loan and then apply a premium to the subsidiary. Traditionally rates can be fixed or floating with a premium.
Corporate Governance
Internal loans should always be monitored. They should not be a quick substitute for proper due diligence. Problems can easily arise if tax authorities reached the conclusion that the loan is being extended to a loss-making entity that would not receive funding externally.
Alternatives to banks – Is Fintech the answer?
| 14-12-2017 | treasuryXL |
The roles of a bank
Banks are, first and foremost, used so that clients can obtain and use financial services. Opening and maintaining accounts enable money to be received and paid – in this way the day-to-day financial operations of the client can be performed. Furthermore, banks offer additional services that compliment the needs of a client – business credit cards for key staff, sales services such as processing of credit card payments for goods, payroll services, online banking, loans and lines of credit.
What does a client want from a bank?
One of the main priorities is that there is an established history and a good working relationship – that the bank understands the client’s needs. A key indicator of a good relationship would be the ability and the willingness of the bank to provide funding to the client. If the bank wished the client to bank and deposit their money with them, then they should be prepared to extend credit where possible – if it meets the criteria of the bank. Running any business means there will be times when liquidity is scarce and a bank that refuses to extend credit runs the risk of losing the client. Other criteria can include the cost of banking services, support given, quality of delivery, credit rating and the overall efficiency of the services.
Fintech solutions
Fintech can provide genuine alternatives to existing banking services as they can compete with modern products – like giant ocean-going tankers, banks are large and very slow to turn around. Most bank services are still paper intensive and require many authorized signatures. By digitizing services, Fintech can reduce the transaction costs and the time taken to authorize a service. Fintech orientated lending services (like B2B) are entirely online and can be quickly approved. Through lending platforms, the risk can be spread out among many lenders.
Can the banks respond?
Banks have at their disposal very large existing customer bases and a wealth of proprietary data relating to the behaviour and patterns of their clients. This is a large untapped potential that does not need to be found or bought. If banks can utilize this data whilst offering a Fintech type of online service that is quicker and more efficient there is a possibility to fight back. The main option for banks would be to examine the Fintech companies and buy the ones that have the best products to compliment the requirements of the bank’s customers. As Fintech works in a different manner to traditional banking, this would require banks to develop internal incubators to discover new products and services that could be offered to customers. Alternatively, banks could look to design and implement their own solutions, but they appear to be behind the speed and knowledge of Fintech and might never be able to catch up.
One last word of advice
Realistically, Fintech offers attractive alternative solutions to banks. However, the power of the personal relationship should never be underestimated. We build relations slowly and by results – the cheapest offering does not get all the business. Having an account manager at a bank can be highly beneficial for a client – one point of contact, good understanding, a history. When things go wrong, you pick up the phone and call the account manager and he/she sorts out your problems. With Fintech, this could mean phoning numerous different companies to achieve the same result that can be obtained with just one account manager at a bank.
Choice is personal, but preference is normally determined by experience.
Gebrek aan voortgang in Voortgangsrapportage Rentederivaten MKB
| 13-12-2017 | Simon Knappstein |
De AFM noemt als reden voor de vertraging “Problemen met automatisering en data. De kwaliteit van de historische data van banken is niet in alle gevallen voldoende om efficiënt de compensatie op grond van het UHK te kunnen berekenen en controleren. Verder geldt dat de rentederivatendossiers van klanten zeer verschillend zijn en vaak bijzonder complex en dat heeft gevolgen gehad voor (de praktische uitwerking van) het UHK. Mede door deze knelpunten blijkt de uitvoering van het UHK in de praktijk complexer dan de banken, de externe dossierbeoordelaars en de AFM hadden voorzien. Dit betekent ook dat de door banken afgegeven planningen onzeker zijn.” Verder staat er: “Zo zijn bijvoorbeeld de derivaten- en lening-systemen veelal niet structureel gekoppeld en is een handmatig proces ingezet om de derivaten aan de juiste leningen te koppelen.” Dat die systemen niet gekoppeld zijn mag geen verrassing zijn voor de banken. Dus waarom dat op dit moment als oorzaak genoemd wordt mag eerder als verrassing gekwalificeerd worden.
De vraag die dit oproept is waarom de banken überhaupt hebben geprobeerd de oplossing te automatiseren. Mijn beste gok is dat er in een eerder stadium ingeschat is dat op de bulk van de dossiers slechts alleen stap 3 (de coulance-uitkering) van toepassing zou zijn. Het zal dan een dure misrekening zijn geweest als blijkt dat het leeuwendeel van de dossiers toch een handmatige benadering vereist. In dat geval is er een hoop geld en tijd verloren gegaan wat niet meer goed gemaakt gaat worden.
In de huidige planning, die dus onzeker is, zijn er 2 banken die verwachten eind 2017 alle aanbodbrieven te zullen hebben verstuurd, 1 bank die rekent met medio 2018 en 3 die mikken op eind 2018. Het zou nog inzichtelijker zijn als daarbij ook vermeld stond om hoeveel klanten het dan gaat per bank.
Een volgende rapportage van de AFM wordt in de zomer van 2018 verwacht. Zoals het er nu uitziet zou het al heel mooi zijn als de einddatum dan niet weer vooruitgeschoven wordt.
De AFM zegt ook in de komende periode kritisch toezicht te blijven houden op zowel de banken als de externe dossierbeoordelaars.
Simon Knappstein
Owner of FX Prospect
Lees ook: Uniform herstelkader rentederivaten mkb