Crowdfunding for trade finance?

Following the launch of the Trade Finance Market (TFM) platform, Geoffrey Wynne, a partner at Sullivan & Worcester UK LLP, considers the potential impact of the platform and highlights a few concerns and benefits of such a scheme.

Original news

Trade Market Finance platform

Trade Market Finance have launched an online market platform aimed at efficiently and transparently funding international trade with minimal risk.

What is the thinking behind this new platform?

The publicity describes it as granting quicker and cheaper access to funding for exporters while at the same time granting access to prospective investors in an easy way to produce good and guaranteed yields and a speedy return. It is not easy to see how this can be achieved without sight of the documentation which each party (exporter and investor) would sign. It is also not clear what is expected of the buyer. For example, does the buyer agree that its payment obligation under an invoice is an irrevocable payment undertaking?

This is of most concern to the insurer who seems to guarantee the buyer’s payment to the investor. This would be a great stride forward, but at what cost to the investor’s return?

How is the platform structured and what investments/investors is it targeting? Is this crowdfunding for trade finance?

It is exporter-led rather than buyer-led. This means the exporter loads up to the platform details of its invoices which are to be sold. The assumption must be that the exporter’s agreement with the platform satisfies all due diligence requirements about the receivable covered by the invoice—for example, payment is an unconditional obligation of the buyer, there are no sanctions issues, the goods are not dual use goods.

It also seems that investors are offered part as well as well as all of an invoice. Thus, there could be more than one investor interested in the receivable—crowdfunding is an interesting analogy. There will be legal issues to consider about the rights of investors to part payments and how to enforce payment of the receivable. Much will depend on the credit insurance policy and the rights each investor has to make a claim. The assumption has to be that the platform provider has an agency agreement with each investor.

Upon any non-payment by a buyer, the platform will have to notify the insurer and demand payment. It will then have to account to the relevant investor(s).

In all cases, the platform will presumably be receiving funds from buyers and paying them to investors. Investors will want protection about their rights to these funds.

What are the risks inherent to this sort of scheme?

There will be a number of concerns, especially for investors, about the quality of the receivables and the certainty that the credit insurance covers them—this seems to be key.

In addition, there must be concerns about double funding of receivables and the nature of the receivable—for example, is it a true trading receivable?

It may well be that the platform provider has to satisfy the investor that it has the certainty of payment from the insurer if the buyer fails to pay. This would mean that the investor ceases to be interested in the parties other than knowing when the receivable is due so that it can base its investment on that. This could mean that, in effect, the investor is just buying a payment obligation of the insurer and is not really financing trade receivables.

A good look at the documentation will be required to ascertain the exact position of each of the parties. If there are risks on the platform, that will have to be considered.

It is not clear what the platform provider is undertaking and whether it has a bank/trustee supporting its payment and collection obligations and role generally. Presumably it has satisfied regulators in Singapore about its position.

How might this affect the trade finance landscape? Is this a viable alternative to the reduction of bank activity in this area?

This could be a positive step in bridging the gap between the amount of trade receivables requiring financing and the availability of the funding available. It could be a viable alternative if funds want to participate. However, it seems that the constraint will be the insurer and how much it will make available generally and to which named buyers. It appears that the insurer will need to be satisfied about the whole transaction. Thus, the platform provider will have to conduct all the due diligence normally carried out by banks and other financers. Much work is required and presumably its fees (and reduced returns to investors) will reflect this.

There are a number of third party platforms offering solutions to financing trade receivables. It will be interesting to see the take up on this. It is certainly unusual, but have they overcome all the potential legal problems?

Interviewed by Alex Heshmaty.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

First published on LexisPSL Banking & Finance. Click here for a free trial.

Relevant Articles
Area of Interest