Can you give us a brief overview of an RCF?

– Matthieu Guillot, Redbridge: A revolving credit facility is an extremely useful liquidity instrument for companies. It can be used to finance the company’s general requirements and to meet one-off cash flow requirements by drawing on a confirmed line that is generally available for five years (often with two one-year extension options). It has to be paid back at maturity.

An RCF can include an accordion clause, which enables a company to increase the size of the credit line without having to obtain the unanimous agreement of the lenders. It can also be used as a ‘swingline’ by borrowers with commercial paper programmes (NEU CP, EuroCP, USCP). A swingline enables companies to draw money at day-value.

In terms of price, an RCF line includes a margin (generally based on the company’s leverage or credit rating), a utilisation fee and the currency index (e.g. Euribor for drawdowns in euros). On the undrawn portion of the loan, the borrower pays a non-utilisation fee. If the RCF is used as a back-up line, it is possible to negotiate tight margins with the bank, because the RCF used as a back-up line generates a very low liquidity cost for the banks.

RCFs can (and will increasingly have to) incorporate ESG (environmental, social and governance) criteria in the form of sustainability-linked loans with two or three performance indicators and trajectories for the company’s sustainable commitment fixed over the term of the loan.

What’s a term loan?

– A term loan is a medium- or long-term bank loan that enables a company to finance its investments or acquisitions. Term loans can have a maturity of up to seven years. It is generally an amortizing loan, although it is possible to negotiate a substantial bullet element.

It is possible and advisable to plan for a quite long period of availability during which the loan can draw, up to three years.

Term loans can also include accordion clauses. Term loan pricing consists of a margin (generally based on leverage or rating) and the currency index (e.g. Euribor for drawings in euros). The borrower pays a non-utilisation fee on the undrawn portion of the loan.

How do companies of different sizes use these instruments?

– Large groups generally use RCFs to ensure their liquidity: they guarantee their commercial paper programmes. They usually take out a term loan when financing an acquisition as part of a mix bridging loan (on capital market issues) / 3-5 year loan, with or without underwriting by banks.

Medium-sized companies often use RCFs as a back-up or to finance their working capital requirements, although they can also be used to finance growth. Term loans are more commonly used by small companies for (pre-)financing capex and acquisitions (hence the advantage of having extended periods of availability).

When it comes to bank debt, is it better to syndicate or use bilateral lines?

– The two formats can actually complement each other and be used together to meet a company’s financing needs. But to answer the question, let’s consider the advantages and disadvantages of syndicated and bilateral lines.

Syndicated credit provides a number of advantages for businesses. First, the legal documentation associated with a syndicated loan can be used as a reference for other kinds of financing, particularly in the context of acquisition financing. Second, syndicated loans can be used to cover a broad range of a company’s financing needs: working capital requirements, acquisition financing and capital expenditure projects (capex). The syndication market is deep, enabling a company to raise significant amounts of bank debt. Finally, syndicated loans are particularly well suited to acquisition financing as they bring together a pool of lending banks.

Bilateral lines also offer advantages. They are generally taken out at competitive prices as the relationship with the bank plays a key role. The legal documentation is generally more flexible and easier to negotiate than for a syndicated loan. That said, it’s important to ensure that the documentation for the various lines is aligned to maintain the same standard of documentation as in a syndicated loan.

Why should syndicated loans and bilateral lines of credit be mixed?

– Syndicated credit is more expensive, but larger amounts can be raised. Bilateral credit lines are less attractive to lenders and the management of credit events such as waivers and amendments is riskier. The administration of bilateral lines in terms of negotiation, refinancing, drawdowns and repayments is also more onerous.

As part of a corporate financing strategy, it can be useful to combine syndicated credit and bilateral lines to benefit from the advantages that these two forms of bank debt provide.

For example, syndicated credit could be used to finance the company’s holding company, with bilateral lines being used to finance subsidiaries. Finally, a syndicated loan can be used as a back-up line for the company’s cash flow requirements, while bilateral lines can be used to finance current needs.

Redbridge – Hello Pascal, hello Pierre, and thank you for joining us today. We’re going to be talking about financing for tech companies, growth companies, scale-ups and unicorns. Could you start off by telling us a bit about Mirakl?

Pascal Ichard, Mirakl – Mirakl is a software publisher specialising in e-commerce platforms. It was founded in 2011 by two entrepreneurs, Philippe Corrot and Adrien Nussenbaum. In the past we have developed a marketplace and dropship platform and more recently we have also expanded into the areas of pay-out and retail media solutions.

Do you have some figures to give us an idea of the size of the company?

Yes. Mirakl is part of the French tech ecosystem, a member of the Next40 and has had unicorn status since our Series D funding roundin 2020. In 2023 there was $8.6 billion of Gross Merchandise Value exchanged on our marketplaces – over 50% more than in 2022. We have around €160 million in average recurring revenue, which is a key indicator for companies in the software sector. We have around 450 customers from all over the world and employ about 750 people.

How is Mirakl’s finance function organised?

Mirakl’s finance function is centralized in Paris, with a few employees in Bordeaux and Boston. We currently have a team of around 40 people, including the legal and IT functions.

What is your role, Pascal?

My role within this organization is to manage cash flow and financing, as well as supervising the accounts, tax and purchasing functions.

How would you describe Mirakl’s financing strategy?

Historically, Mirakl has developed as a company with fairly limited financing needs. Our SaaS (Software as a Service) model generates recurring revenues. Scrupulous monitoring of costs and investments has helped to limit our cash burn.

Since its creation, Mirakl has tended to finance itself through equity, with significant fundraisings in 2019, 2020 and 2021. Our latest round of $555 million valued the company at $3.5 billion. This funding enabled us to invest in innovation, drive our geographic expansion and launch new products.

How does the syndicated loan fit into this strategy?

The syndicated loan is linked to the increasing maturity of the Mirakl group. Our prior fundraisings have been important in helping us to develop Mirakl, but from now on the idea is to have maximum flexibility and a more balanced pool of partners providing our financing. This means we now receive strong support from investors who have been with us almost since our creation on the one hand, and bank lenders on the other.

Credit facilities have become a popular component in the financing strategies of tech companies against a backdrop of a dearth of very large fundraising rounds since 2022. There are still many investors backing companies and projects in their early stages, but they have become much more cautious than they were in 2020-21, when a huge amount of money was raised in France.

The syndicated loan is intended to diversify your sources of finance, but why do you need it?

Mirakl’s syndicated loan, which we signed last year, is an extension of our financing strategy. It’s an additional building block that will enable us to finance potential acquisitions and support our continued growth.

The idea is to find less dilutive sources of finance with a better balance between equity and debt. By rebalancing our sources of financing, we know that we can now rely on our historical investors and the cash that is already available to us, but also on this new banking pool and this credit facility, which has already been negotiated, if we need to position ourselves for an acquisition. It means we can act quickly if we see an interesting target. The syndicated loan is therefore important from the perspective of our company’s strategy.

How did you go about setting up this inaugural syndicated loan?

The transaction took place in the first half of 2023, after we had decided to embark upon this course of action at the beginning of the year. The transaction took a few months to complete, which is in line with market practice.

What were the criteria for selecting the banks?

We selected our banking partners on the basis of their ability to support us with this financing transaction at attractive terms, but we also looked beyond this individual syndicated loan.

Our idea was to understand how the banks joining the pool could support us in other areas. For example, we looked at the geographical footprints of the banks and chose those that could support us in our geographical expansion.

We also looked at the quality of cash investment opportunities offered by these institutions in a high interest rate environment.

Finally, I mentioned that the purpose of this financing line was to fund potential acquisitions. With this in mind, we looked at the strength of the banks’ networks. We expect our banking partners to be able to suggest targets and put us in touch with them. In short, the banks need to be able to facilitate the work of our teams dedicated to external growth.

All this led us to select more global partners, to which we can give side business in the short term and that will be able to help us when we engage in major operations in the future.

Who are your banking partners?

Our pool of five banks is made up of two historic partners and three who joined the pool at the time of the deal: Natixis, HSBC, BNP Paribas, JP Morgan and Société Générale.

How much was the funding package?

We syndicated €100 million with an option to extend. It’s an inaugural loan, so the idea was to structure an initial operation that was intended to live on and that will enable Mirakl to secure further credit facilities in the future.

Why did you enlist the services of an external advisor to lead this inaugural bank financing operation?

Start-ups and scale-ups are unusual in that they grow fast. Their teams are often very busy, with lots of issues to deal with, and the teams are often in the process of being structured. Mirakl’s finance department has grown considerably in just a few years, and we didn’t necessarily have all the expertise in-house or the time available to work on the deal ourselves.

Bringing in an external advisor was an obvious choice for what was going to be an intricate operation, in which there would be a lot to negotiate. We felt it was imperative to receive support from a consultant with experience of this type of deal and who could alert us to the key points, support us during the negotiation phases and provide us with benchmarks on market clauses and conditions based on their knowledge of similar deals set up by companies with the same kind of profile as Mirakl.

How did you work with the Redbridge team?

We benefited from the support of the Redbridge teams from the outset – even before we contacted potential banking partners, in fact. The objective we set the Redbridge teams was to coordinate the operation and assist us on a day-to-day basis. We also had a real desire to train ourselves, so there was an educational aspect to the project to help us get to grips with the subject of financing.

And what did the Redbridge team deliver?

While respecting confidentiality, Redbridge helped us with the negotiations by telling us what was generally acceptable, what wasn’t and what we should focus on in our negotiations and discussions. A number of our staff were already familiar with Redbridge’s work in cash management and treasury, so it was quite natural to put them in touch with Redbridge’s finance advisory team.

The Redbridge teams were with us every week and provided regular progress updates. All the planning was in place from the outset, enabling us to keep the operation on track, with clear milestones set out. We had support at every stage of the process, from negotiations to defining the terms of the loan. This enabled us to close the deal before the summer and everyone was able to go on holiday with peace of mind.

How do you draw up your initial bank financing documentation, bearing in mind that this will become a reference point for future documentation?

Before launching the deal, within the company we needed to document our trajectory, prepare our Info Memo, and talk about the past and our ambitions for the next four to five years both in terms of our product roadmap and in terms of figures. Basically, we had to explain where we wanted Mirakl to be in the future.

As far as the documentation itself was concerned, we relied on the Redbridge teams to ensure that the documentation framework negotiated would be with us over the long term and also on the day when we needed to renegotiate. It was important to create a basic framework.

Pierre, I’m sure you have a few words to add on this subject…

Pierre Bonnet, Redbridge – In all transactions, and particularly in inaugural ones, the three facets of price, size and documentation need to be successfully negotiated simultaneously, and without one of acting to the detriment of another.

When it comes to documentation, you need to have very clear objectives from the outset – intangible things that you know you don’t want to give up, and ensure you can achieve them through good preparation for the consultation, through the info memo, and by having a very clear conviction about the quality of the credit.

How many banks were consulted?

Pierre Bonnet – We consulted quite a few banks, for several reasons. First, because Mirakl is a very good credit risk, we knew that many lenders would be interested in a deal like this. We know that banks are looking for fast-growing companies, scale-ups, French tech firms, members of the Next40. Mirakl operates in a world that’s attractive to banks, but it’s one that they don’t really know much about.

We worked together with Mirakl to find the right way to get the banks on board.

Pascal Ichard – A lot of banks were interested, even though they’re more used to working with very mature companies. Not all of them were familiar with the business models and trajectories of scale-ups. Unlike investment funds, which focus on growth and the top line, banks are more concerned about profitability issues and they are also more risk-averse.

There was a real need to explain our business model and what lies behind the figures. We emphasized the new markets that were opening up and our new products, and we had discussions with certain banks that had difficulty understanding the business models of fairly young companies. This was often because they did not have a practice dedicated to this customer segment. In the same way that Redbridge taught our teams about certain aspects of the structuring of the credit facility, we saw that we needed to teach the banks about our figures and our trajectory.

What can be done to align the banks’ views on Mirakl credit?

Pierre Bonnet – To reconcile views, it’s important to build strong convictions – to help them understand our business model, concepts related to activation, and to see how all this can be reflected in the documentation.

It’s important to understand that companies like Mirakl, whose sales volumes can grow by more than 50% in a year, are rather special animals. We need to avoid having credit documentation that constrains such companies. Banks need to understand that trajectories can change very quickly, and that scale-ups have different needs to traditional companies.

To achieve alignment, it’s vital to consult a sufficiently large number of banks to find those that will support the company’s vision for the future.

Was it difficult to build a strong relationship with your banks?

Pascal Ichard – Having some form of recurring income helps, of course. You need a fairly clear route to profitability, and it shouldn’t be too far off, so that the banks are prepared to take a bit of risk. Finally, the quality of the investment funds backing the company, the quality of the management team and the amount of funds raised, all matter enormously.

Following this inaugural round of financing, what are the plans for Mirakl’s treasury financing department from here?

We have to bring this pool to life. We are in the process of building long-term relationships with our new lenders. We are reallocating side business to certain geographical areas, and we are distributing our new business to this or that player. I also mentioned the subject of investments, which means we are open to new products and new offers from our new partners.

We’re also looking at optimization issues, such as WCR, which perhaps we haven’t taken the time to address until now. These can be interesting subjects and can lead to side business for our banks. At the same time, we are continuing to optimize our flow management.

Do you have any projects relating to the organization of cash flow and payments?

Mirakl is fairly centralised, so there will come a time when we’ll need a cash management system to streamline the management of external flows, but it’s not a priority at the moment. Things will evolve according to what’s going on, so we’ll probably have to deal with this when we make a major acquisition.

Has Mirakl broached the subject of green financing?

It’s a subject we’re considering. We work a lot on ESG issues in collaboration with Mirakl’s CSR team. For the time being, this work has mainly focused on cash investment. We are currently working on integrating ESG issues and our ESG trajectory into our financial policy.

What impact has your new business had on your banking relationships?

One of the major challenges was to convince the banks about our new retail media business, which we are investing heavily in and in which we have a great deal of confidence. We also have more and more flows in foreign currencies due to our joint venture in Japan and our new businesses in the APAC region and Brazil, and this is giving rise to foreign exchange issues. The development of our business is generating new side business opportunities that we need to work on.

How did Redbridge add value throughout the process?

They helped us in terms of keeping to the timetable, educating our teams and the banks, and their ability to put things into perspective. They also did a lot of work to ensure that the documentation was not too restrictive. This was important because we need to avoid having belts and braces imposed on us so that we can continue to grow.

– Can you briefly describe the US Private Placement market?

– Muriel Nahmias, Redbridge: US Private Placements are multipurpose financing instruments tailored to the needs of US and European companies with a solid credit profile. Like any private placement offering, they’re essentially halfway between bank financing and bond financing.

The main investors and lenders are US insurance companies and asset management companies. They have a long-term horizon and they have a buy-and-hold approach. The market is deep, always open and highly international in nature. There’s more than USD 100 billion of new issuance every year, with nearly 30% of the volume coming from Europe.

Almost all – 98% – of the transactions are of investment-grade credit quality. Around 70% of issues are used to fund corporates, 25% are for infrastructure or project finance, and the remaining 5% to finance leases.

– Why should European corporates be interested?

By turning to the US Private Placement market, companies can raise amounts ranging from USD 50 million to more than USD 1.5 billion, with maturities from 7–30 years. That means they have a far wider range of options available to them than banks or the Euro Private Placement market are able to offer. What’s more, it’s possible to raise funds in complete confidentiality, generally without an external credit rating, and in a variety of currencies, including US dollars, euros and sterling.

Depending on basis swap conditions, it can be cheaper to access euro-denominated funding on the US Private Placement market than on its Euro equivalent. And that’s what we’re seeing at present: companies have been making savings of around 60 basis points on recent financing deals that are broadly equivalent in terms of credit quality and maturity.

Deferred funding is also possible at a modest cost. Meanwhile, a shelf programme can be granted by certain Tier 1 investors, enabling companies to lock, on an uncommitted basis, an additional amount after an inaugural issue.

– What do issuers need to pay attention to?

It’s important to bear in mind that investors in the US Private Placement market are generally highly sophisticated. They ask many questions and require clear answers during discussions. Their objectives can also be heterogeneous. The issuer must have a good understanding of the points to be negotiated and any potential hurdles to overcome if they want to optimise the terms and conditions and/or maximise the size of the deal.

The National Association of Insurance Commissioners (NAIC) assigns an internal rating to the transaction after it is issued. This rating (called NAIC designation), which in principle remains private, determines the regulatory capital charge that the insurance company must hold to back the exposure. Consequently, it may influence the positioning of investors in the US Private Placement market. Some investors may want a credit agency rating – which may also remain private – in order to secure an NAIC 2 rating.

Although the main contractual terms of a US Private Placement are generally aligned with the existing primary credit facilities of the issuer, there are some differences, particularly with regard to external debt in subsidiaries, asset disposals, financial covenants and off-balance sheet financing. Issuers also need to be aware of early repayment penalties. ‘Make whole’ clauses may be applied in the event of early redemption, as is the case with all bond financing, and they can have significant financial repercussions.

– Who are the eligible borrowers?

The US Private Placement market is only accessible to issuers of investment-grade credit quality, although they do not necessarily need an official rating. Companies wishing to access this market must have a stable business model with recurring cash flows and a maximum normative leverage level of 2x, although in exceptional conditions this may go as high as 2.5x if it is the result of the likes of mergers and acquisitions or specific one-off capital expenditure. Issuers must be leaders in their sectors, with sales of at least EUR 600-800 million per year, in our view. One thing to bear in mind is that the NAIC uses similar methodology than the major rating agencies (S&P and Moody’s), which favours large corporates. It has also tightened its criteria since the COVID pandemic. It’s possible to secure an NAIC 2 rating with other NAIC-approved rating agencies, such as DBRS or Kroll, which assign greater weight to the business profile than the financial profile.

– What are the main requirements in the documentation?

A single covenant is generally possible if the view on credit quality is solid. This leverage covenant is tested semi-annually to ensure compliance with established leverage ratios. There are limitations on subsidiary debt, generally set at between 10% and 15% of total assets. Limits are also imposed on asset disposals, with a right of first refusal on disposal proceeds if there are mandatory early repayment clauses in any of the company’s other financing.

Investors justify these strict requirements with the long maturities – up to 15 years for corporate financing – that they offer and the demands of their own investors. Their criteria ensure that the US Private Placement market is of high quality and that it is relatively safe for their investors to allocate to. There can also be tough negotiating points. We enable companies to access the attractive financing on offer in this market within a structured and transparent framework. The set-up process, which generally takes 2-3 months, must be rigorous and well prepared.

– How do spreads on euro-denominated transactions compare with what’s on offer in the Euro Private Placement market?

Historically, euro-denominated US Private Placements have offered more attractive pricing than similar deals in the Euro Private Placement market – on average, the difference has been around 40 basis points. But they’re even more attractively priced in relative terms at present – they’re currently around 60-70 basis points cheaper.

Treasury departments: a mix of generalists and specialists

Our recent survey of treasury organisations confirms the existence of two kinds of treasury department: those in SMEs and SMIs, which are generally made up of generalists, and those of large groups, in which treasury team members generally focus on particular areas.

The treasurers in SMEs and SMIs have very limited resources at their disposal. Generally, they cover the three dimensions of treasury – risk, cash flow and liquidity management – with teams ranging in size from just two to eight people.

Companies with turnover of EUR 5 billion and above tend to have much larger treasury teams.

Beyond this threshold, there can be big differences in terms of the number of team members. This is because treasury departments may face specific challenges and as organisational issues often take on greater importance in larger firms.

Source: Redbridge – Corporate Treasury Organisation Survey, May 2024

 

 

A budget comparison tool for treasury-finance departments

 

 

Source: Redbridge – Corporate Treasury Organisation Survey, May 2024

 

Half of the respondents to our survey shared information about their treasury-finance department’s budget.

The distribution of these budgets, excluding bank and card fees, increases steadily in line with company turnover. This information? makes it possible to assess whether a treasury team’s budget is within the normal range for the company’s turnover.

Information systems: a huge drain on human resources

Regardless of the size of the company, on average the finance department allocates close to 20% of its time to financing matters. In relative terms, cash flow / cash management requires less of the treasury staff’s time? in the largest groups.

By contrast, the proportion of time allocated to risk management and managing information systems rises sharply as company turnover increases. This can be explained by the higher number of tools dedicated to daily tasks being used as the company grows.

 

Source: Redbridge – Corporate Treasury Organisation Survey, May 2024

 

 

 

FIRST SESSION – March 12th, 2024

Optimization Strategies To Improve Approval Rates

On March 12th, 2024, at 16:45, please make your way to Room Potsdam 3, where we will address the merchants’ primary quest in payment solutions: how to provide shoppers with the best customer experience, maximize revenues, and enhance customer retention while adhering to stringent anti-fraud requirements? Join us as we explore innovative strategies to tackle these challenges.

• Understand your payment flow, whether it involves a customer-initiated transaction (CIT) or a merchant-initiated transaction (MIT).
• Select the right Key Performance Indicators (KPIs) to monitor your acceptance rate.
• Discover approaches to optimize your process.

SECOND SESSION – March 14th, 2024

Facilitating Value-added Services for Modern Ecommerce

On Thursday, March 14th, just before the conference concludes, Gabriel Lucas will host a roundtable titled ‘Value-added Services for Modern E-commerce’ at 10:45 am. This session promises a dynamic exchange of ideas and will feature panelists from leading industry players.

Joining Gabriel on stage are distinguished speakers, including Julian Martin from Miravia (Alibaba Group), Samuel Flynn from Hands In, Jana Maleckova representing Everifin, and Yves Ruland from Datatim. Together, they will explore new forms of value-added services as important sources of revenue and market advantage for payment players. The panel will also discuss innovative strategies and emerging trends in value-added services tailored to meet the evolving demands of contemporary e-commerce.

To stay updated on the latest developments and join the conversation, follow the hashtags #mpe2024, #MPEAwards, #mpecosystem, and #ILOVEMPE across social media channels.

Redbridge is looking forward to engaging with you at MPE 2024!

Link to register: https://www.merchantpaymentsecosystem.com/get-ticket

 

If there’s to be a shift towards a more sustainable and environmentally friendly economy there needs to be massive investment: it’s been calculated that implementing the European Green Deal will require around €520 billion of investment per year between 2021 and 2030. While public authorities are providing support to hasten the transformation of key sectors of the economy, start-ups and innovative small- and medium-sized companies are still facing challenges in accessing private finance. The stakes are high, as they may need this funding – often within a tight timeframe – to execute their development plans.

And the way start-up growth companies can secure initial bank loan early is evolving. Traditionally, lenders have tended to provide support based on established activities – which are often limited for such companies – which means shareholders have generally been responsible for funding development. But at a time when investment in crucial social and environmental projects needs to accelerate, equity fundraising is slowing down. According to a report by Atomico in November 2023, total capital investment in the European tech ecosystem in 2023 looked set to reach $45 billion – far below its peak level in 2021, when it surpassed $100 billion.

Given the fluctuating nature of the equity fundraising, bank debt plays a crucial role in ensuring that growing companies can obtain the funding they need to carry on expanding.

How to persuade lenders to lend

Securing bank finance is generally challenging for companies that are still to prove that they can be profitable. Lenders often turn away such firms when they need substantial investment, even if their business model is transparent and their technology proven. Failures to raise debt in this way are typically kept private, but credit committees generally raise concerns like: “not convinced about the company’s ability to make a profit in the near future,” “too early in the company’s development,” or “isn’t this more the role of equity?”

Nevertheless, companies at the early stages of their development may approach a bank successfully before asset financing is in place if the projects they are involved in have attained a certain level of maturity and the primary development and profitability risks they are exposed to have been mitigated. Recently, a number of companies involved in the energy transition and tech have managed to secure funding by showcasing their ambition, methodology, and transparency. They have done this by making clear the key elements of their credit story. It is also thanks to their in-depth understanding of how banks work and their ability to garner support within these institutions.

Much like a compelling equity narrative is vital when raising equity capital, a company looking for bank financing needs to develop a credit story that is realistic, well-argued and impactful. It must also set out how it will be able to repay the money it wants to borrow based on the company’s capacity to grow and settle or refinance the loan in the medium term. Banks are rarely willing to provide borrowers with a window of longer than two years to generate a positive profit.

All this means that a company’s underlying technology needs to be operational and have entered the commercial and industrial deployment phase. Biotech companies, which predominantly use the money they raise in product development, are for this reason excluded

Bankers also generally stipulate that the company’s initial liquidity needs must be covered by the equity they have already raised, with bank debt seen as a complement to equity. As such, a well-planned timetable for raising both equity and debt is vital.

To ensure the business plan is credible, the application must provide evidence that the company is moving towards sustainable profitability by including detailed information on the company’s projects, with a focus on their maturities and execution risks. This kind of detail enables banks to assess the company’s capacity to repay its debts.

The importance of optionality and assertiveness

Another crucial aspect of a business model – and one that is often overlooked in credit analysis – is the value of optionality; specifically, a management team’s capacity to adjust its strategy. This optionality might involve slowing some investments to preserve liquidity or welcoming new investors to finance assets under development and meet cash requirements. Although they are not always easy to quantify, such options strengthen a company’s credit profile by providing a safety net to banks in the event of a company’s business performance deteriorating.

While the most mature projects may secure growth through non-recourse asset financing, while the various layers of future financing and their legal security structures becomes imperative. When it comes to the financing of holding companies, it’s important to explore other mechanisms to reassure lenders, such as providing enhanced visibility over flows returning to the holding company, partial early repayment mechanisms, and control of the portfolio of projects under development.

It’s also important to be creative when it comes to the credit framework. For growing companies with negative or low EBITDA, conventional covenants such as leverage are likely to be either ineffective or excessively restrictive. To help banks track the pledge while preserving operational flexibility, it is better to use indicators like recurring annual revenues, sales volumes or the physical deployment of infrastructure.

Even though borrowers may not be in a strong negotiating position with banks, it is nonetheless crucial to be assertive about the structure of the loan taking into account factors like its term, maturity schedule, covenants and undertakings to perform and not to perform. This is especially pertinent in the case of an inaugural loan as it will serve as a benchmark for subsequent loans. The financing margin must be assessed against other, potentially more costly financing options.

Mixing lender profiles

Lenders’ appetite to provide funding is linked to the potential to do business with a company in the future. Activities such as cash management, cash flow, sureties and guarantees, asset financing, interest rates, foreign exchange hedging, equity financing, or, in some cases, wealth management for the company’s founders – all these commercial levers can effectively engage competition amongst potential lenders.

It is evident from Redbridge’s recent advisory deals that the most successful outcomes for companies seeking funding are achieved by combining regional banking networks, which are responsive to the opportunity to bolster development in their territories, with global investment banks that are more interested in ancillary business opportunities.

For early-stage companies seeking bank financing, advisors have an important role to play in reassuring lenders, crafting the credit story negotiating the best possible terms and conditions, and helping the company understand the way that banks think and work. Meticulous preparation of the application before entering any discussions with lenders maximizes a company’s chances of obtaining the financing it needs to secure its growth momentum.

 

The following article was originally published in the Cross-Border Payments and Ecommerce Report 2023–2024 by The Paypers. To access the full report, you can download it here.

 

In today’s fast-evolving digital environment, businesses face a significant challenge in addressing the gap between legacy technology and digital transformation. Owners are compelled to reassess their business models and respond promptly to meet their customers’ needs.

On the one hand, companies must maintain the reliability and functionality of their existing legacy systems, often the backbone of their operations. However, legacy payment systems are progressively losing their effectiveness in fulfilling their original purposes while they become expensive to maintain. On the other hand, companies must harness the transformative potential of digital technology to remain competitive and responsive to the evolving demands and expectations of modern consumers. Transformation can be very expensive, both from a system and an organisational standpoint.

Bridging the gap between legacy technology and digital transformation is a critical endeavour for merchants and service providers seeking to uphold their competitiveness and relevance in today’s changing business landscape. For payment providers, escaping from legacy systems is usually necessary to remain competitive and gain new customers. For merchants, making the switch will highly depend on how central innovation and payments are to their value proposition.

As there is no ‘one-size fits all solution’, companies must align their payment strategy with short, medium, and long-term objectives, and carefully assess the return on investment (ROI) of each type of project.

Assessment – acceptance and customer experience

In the ever-changing environment of the payment sector, the top priority is delivering an optimised, user-centric experience. As new payment methods and technologies emerge, customers engage in online transactions and mobile payments – and expect to have a seamless, effective, and user-friendly payment process. Legacy systems might struggle to adapt to these requirements causing friction and confusion for users. The aim is to make payments as streamlined as possible – and offer the most relevant payment options to maximise revenues.

Security, risk management, and compliance

Outdated technology systems present a significant security dilemma. These systems often lack the advanced security features that are standard in modern technology. They may no longer receive vital security patches or vendor support, rendering them susceptible to known vulnerabilities and potential exploits. Additionally, these obsolete systems might not align with the compliance prerequisites and standards dictated by the industry regulations and data protection laws – especially in sectors such as the Payment Card Industry Data Security Standard (PCI DSS) and the General Data Protection Regulation (GDPR). Non-compliance can result in severe violations and lead to legal and financial repercussions. At the same time, working with very innovative and young companies may be a risk per se, as they may not be as solid and robust – both from a technical and financial standpoint.

Architecture and internal organisation

The process of integrating older legacy systems with modern digital tools, platforms, or third-party services poses a substantial challenge. Legacy systems frequently lack the compatibility necessary to integrate with modern APIs and data formats. This mismatch not only complicates the technical aspects of integration but also heightens the risk of operational disruptions, complexities in data transformation, and potential security vulnerabilities.

To address these obstacles, a strategic approach is needed, which may involve the use of middleware, data transformation procedures, and security measures to bridge the divide between legacy and contemporary technology. For such transformation, it is imperative to have a team well-acquainted with both legacy system intricacies and modern technologies to formulate effective integration strategies. Moreover, promoting collaboration, offering training, and highlighting the long-term advantages of integration can create an environment in which employees are more willing to embrace and actively participate in the transformation process.

Providers and outsourcing technology

When it comes to providers in such a fast-paced environment, they can be both a challenge and the solution. While providers that struggle to keep innovating can very quickly become a burden for companies where innovation and go-to-market is at the core of their value proposition, established providers, although usually more legacy, can be the best fit for companies mature enough to manage most of their payment complexities internally. Moreover, internal legacy challenges can also be tackled by outsourcing certain activities to specialised providers.

Cost and opportunity loss – ROI

As already mentioned, maintaining a legacy system can be quite expensive. One the one hand, sometimes fixing minor issues will not solve the root cause – and worse, it may lead to an accumulation of bigger problems and risks. At the same time, legacy systems usually suffer from manual processes to deal with the lack of features and automation and drastically reduce the time to market with subsequent opportunity loss. On the other hand, upgrading your system will result in an efficiency gain, contrary to legacy accounts that reduce your operational efficiency – but it can also represent a very significant investment. Therefore, an ROI approach with a clear roadmap is required to define the right strategy and facilitate the decision-making process.

Recommendations

As payments tend to have more central roles across all organisations, staying ahead of the game has become a strategic objective for most companies and verticals. However, while new companies can rely on the newest technologies straight away despite a potentially higher cost, more established companies must embrace a more thorough and tactical approach to adopt such types of transformation projects.

While short-term initiatives may help find part of the necessary resources and arguments to obtain the necessary buy-in to move towards transformation, companies must prepare for the future and set medium and long-term objectives with a structured and agile roadmap.

The following article was originally published in the Cross-Border Payments and Ecommerce Report 2023–2024 by The Paypers. To access the full report, you can download it here.

 

What is the current context in B2B payments?

The current context in B2B payments is shaped by the aim to align more closely with the B2C payment experience.

Indeed, merchant cards and digital payments have been historically focused on B2C – this is particularly true in Europe, while other countries like the US are very used to paying by card even for high-value B2B transactions. The main reason is that B2B payments have been traditionally more complex, involving more extensive onboarding requirements, and usually offering a payment term of several weeks after the invoice is issued.

However, digital payments have started to disrupt the B2B space as well, starting with those sectors where clients are relatively small and transaction value is low, and therefore, the customer journey is relatively close to B2C. Many B2B companies are also launching a direct B2C channel via ecommerce, and they must deal with this new field of expertise that they didn’t use to have.

What are the main payment-related challenges that B2B merchants are facing, and what are their main objectives? 

The main objective that most of our clients share is the acceleration of the order-to-cash and pay-out processes. This requires exploring innovative payment solutions to facilitate faster money transfers, as well as implementing automation across various processes, from onboarding and billing to dunning and reconciliation.

Another typical concern for merchants when talking about payments is the cost, which is particularly high when it comes to commercial cards and cross-border payments. Merchants may try to mitigate this challenge by negotiating transaction fees with their payment providers and exploring alternative payment methods and solutions.

In this pursuit of automation and cost reduction, streamlining risk management, including credit and foreign exchange (FX) management, has also become essential to ensure efficient and successful collection and disbursement processes. Lastly, enriching data analytics and prioritising data security have become a must-have to understand the market and adapt rapidly to remain competitive.

What innovative solutions are currently proposed? What trends may we expect to see soon?

As B2B payments are part of a much longer process than B2C transactions, streamlining payments as one of the key components of the order-to-cash process is extremely important, and there are a few solutions that are quite a hot topic at the moment:

• Open Banking (applicable to the European Economic Area – EEA) – leveraging account data and payment initiation through Open Banking provides a smoother and more secure payment experience while improving operational efficiency versus traditional SEPA Credit Transfers (SCT). Coupled with pay-by-link, we expect its adoption to increase significantly once electronic invoices become mandatory in Europe (expected by mid-2024 for companies subject to VAT).
• Instant Payment (SEPA Credit Transfer Inst in the EEA) – instant payment solutions, enabling transactions in as little as ten seconds, are gaining traction as they have been proactively pushed by European institutions.
• Buy Now, Pay Later (BNPL) – this payment option is the combination of payments with credit scoring and insurance services, and it allows merchants to further automate and outsource the risk inherent to offering a payment term.

Pay-out is also an area where we have seen a lot of innovation recently for B2B:

• Virtual cards and purchasing card (P-Card) programmes – these products streamline expense control and transaction analysis, while generating revenues for the merchant out of the interchange.
• Visa B2B Connect and Mastercard Send – partnerships like Visa’s collaboration with Swift aim to enhance international B2B payments, offering more options and end-to-end transaction visibility. Similarly, Mastercard’s partnership with B2B Pay aims to improve the efficiency and cost-effectiveness of international transactions.
• Pay-out platforms – these platforms focus on streamlining processes and managing FX, making cross-border transactions more efficient, both from an operational and a cost standpoint, by aggregating money transfers and therefore reducing the number of transactions – and by limiting or even removing the intermediaries (i.e., correspondent banks).

Another type of solution that has spread significantly in the B2B space is expense management. Easy access to detailed transactions associated with their respective receipts or invoices simplifies expense reporting, replacing slow and inefficient processes like spreadsheets and receipt-filled envelopes.

What do you think are key success factors for B2B merchants implementing new payment solutions?

B2B merchants seeking to implement new payment solutions must consider a few critical success factors. First, integrating these solutions with legacy systems is paramount, ensuring a seamless transition within broader digital transformation initiatives. Second, effective integration with ERPs like SAP or AX and CMS platforms like Magento 2 is crucial in creating an integrated and harmonised system architecture. Lastly, understanding budget constraints and adhering to a well-defined roadmap is essential to ensure its success.

What is your advice for B2B merchants who are still hesitant about embracing payment innovation? 

My advice for B2B merchants who are still hesitant about embracing payment innovation is to take a pragmatic and ROI-based approach to assess their payment architecture.

Merchants can start to evaluate their current needs, keeping in mind that sometimes small changes (quick wins) can bring significant benefits. This process should involve all relevant departments in the decision-making process, as payment transformation is usually a transversal topic, while keeping their workload to the minimum required. This collaborative approach ensures that diverse perspectives are considered without overwhelming teams, and without leaving out any potential impact.

US interest rates are set to fall this year, and that’s undeniably good news for businesses. The Federal Reserve’s willingness to relax monetary policy implies inflation is gradually coming under control, and it will lead to reduced financing costs. It currently anticipates three 25 basis point rate cuts in 2024, which would bring the Federal funds rate down from 5.25%-5.50% today to 4.50%-4.75% by the end of the year.

Nevertheless, US treasurers need to monitor the effects of interest rate cuts on cash deposit yields, and particularly on earnings credits. These earning credits offset some of the cash management fees charged by banks.

Over the past two years, only a tiny fraction of US corporate treasury departments have reaped the benefits of interest rates shooting up. Banks have either refrained from raising their customers’ earning credit rates (ECR), or have done so to a limited extent and with a considerable delay in response to rates rising. But as interest rates start to fall, it’s unlikely that the banks will be so slow to pass on the downwards movements.

A few well-informed treasurers took the opportunity to link the interest rate on their cash deposits to a benchmark rate. This approach enabled them to benefit from all the rate increases without unnecessary delay. Their negotiations with their banks extended beyond merely fixing a spread with a benchmark rate.

Meanwhile, some treasurers established a hybrid yield structure. This meant that if the earning credits were in excess of cash management costs, the bank would reimburse the surplus in the form of financial interest. Others successfully negotiated the extension of the earning credits system to cover additional types of bank charges, accounts held abroad, or even those in another currency.

Given the considerable disparity in earnings credit rates that different banks provide, negotiating with banks to secure a more favourable earnings credit rate could be an excellent way for treasurers to counter the impending decline in US short-term rates. The objective should be to negotiate the highest spread possible and the broadest possible application of the earnings credits mechanism.

The impending fall in interest rates serves as a reminder for all US treasurers to review their cash management strategy and make the most of the banking services available to them. With that in mind, here are our four top tips for 2024.

• Analyze the cash management fees you pay to each bank and ensure your invoices always align with the prices you’ve negotiated and the services you’ve used.
• Stop paying for services you don’t use and close any dormant accounts to cut your costs.
• Focus on the most efficient payment methods and services based on criteria such as speed of execution, security, cost and integration with the company’s other information systems.
• Consider renegotiating how much you pay for these services to substantially reduce the cost of cash management.
• Aim to foster a dynamic banking relationship that goes beyond mere negotiations and look to engage in genuine dialogue with your partners on how they help you grow your business.

In short, your goal for 2024 should be to incorporate the decline in interest rates in your US cash management strategy and do everything you can to turn it into an advantage for your company!

Register now to secure a robust US cash management strategy!

 

Explore the top strategies for navigating US banking with ease:

• Reinforce Strategic Partnerships with U.S. Banks (secure financial assistance and maintain financial stability).
• Optimize Collections and Payments (maximize liquidity, improve financial health, and ensure sustained business growth).
• Receive Support for Yield & Fee Renegotiation (leveraging Redbridge’s exclusive database for the best deals).

Gain firsthand insights from industry experts:
Discover insider advice from Mr. Menad Bouali, Head of Corporate Finance & Treasury at AXA Partners, on successfully renegotiating U.S. cash management fees.

Register now: https://zoom.us/webinar/register/WN_MBymnnDISAe0HVO3NtMvgQ#/registration 

The payment industry and its systems have undergone a transformative shift driven by the remarkable growth of global ecommerce, which has reached a substantial value of USD 5.4 trillion in sales in 2022. Among the various ecommerce models, several marketplaces have emerged as dominant players in this landscape, leading to the consolidation of a significant portion of online sales.

With highly decentralised business structures serving as models of inspiration for business entities, businesses are now seeking to extend payment systems beyond transactions and explore the order-to-cash value chain. Additionally, innovative financial services such as those provided by licenced third-party entities like PayFacs:

• register a CAGR of 35.1% in the forecast period spanning from 2021 to 2026;
• offer new avenues for businesses to deliver value-added services to existing customers;
• create diverse revenue streams.

In this article, we delve into the strategies that empower businesses to thrive in this fast-evolving ecosystem, from B2B to B2C, and their platforms, as well as financial services (B2B2C) to direct-to-customer.

Direct-to-customer merchants are continuously striving to improve the consumer shopping experience, by implementing value-added services, which allow them to generate additional revenues.

 

On the one hand, some of those services indirectly bring additional revenues by improving customer experience:

• payment facilities – offering alternatives to pay such as Buy Now, Pay Later (BNPL);
• omnichannel experience – which enriches customer shopping journey by switching between online and offline channels and thus, boosting sales opportunities;
• automated billing and reconciliation processes – providing efficiency and accuracy in financial operations, particularly suited for subscriptions and SMB transactions;
• the ability to offer an embedded customer portal, especially for B2B customers, to provide the option of easily following the payment status.

 

On the other hand, certain services can still bring value to consumers while directly generating additional revenues to the merchant:

Dynamic Currency Conversion (DCC) stands out as a powerful financial tool that benefits both customers and businesses by providing transparency, convenience, and clarity in currency conversions while generating additional revenue for the merchant at every transaction.

Tax-free shopping can be an attractive proposition for international customers by automating the time-consuming process of getting the tax refunded, leading to additional revenue for the merchant at every transaction.

Card issuing enables merchants to deliver value-added services to existing customers and generate additional revenues by providing branded payment cards, loyalty programmes, exclusive promotions, and enhanced customer experiences. On the one hand, direct additional revenue is generated through interchange fees; on the other hand, it offers access to customer data which allows for personalised marketing, cross-selling, and upselling opportunities.

Marketplace/platform model

A marketplace is an online platform that connects buyers and sellers, facilitating the exchange of goods and services. It acts as an intermediary, allowing multiple sellers to showcase their products or services to a wide audience of potential customers. In addition to its key advantages and core services (billing, pay-in, tax collection, account management, and pay-out), the marketplace can propose enhanced and additional value-added services as well as its core services, which can be monetised as part of the package:

All direct-to-customer value-added services can also be proposed. Card issuing appears to be an innovative topic in this type of business.

Enhanced billing and tax management, although a core service, may be a key differentiator to attract more end-users and vendors to the platform.

Faster payouts may bring vendors more control over their cash flow by allowing a quicker receipt of funds (even instantly in certain regions).

Financing options can be proposed to vendors. This is the case for Amazon which proposes ‘Amazon Lending’, a service where loans range from USD 1,000 to USD 750,000 – and are capped at 12-month repayment terms for retailers after they’ve completed a short online application form. Loans are automatically deducted from the seller account disbursement at a fixed percentage each month.

Cash management facilities – by proposing financial account creation to sellers – offer several benefits like fund retainment, payment of invoices, receipt of funds (even from external bank accounts), interest charges, and control of cash-management flows. Those financial accounts may also be associated with cards issued by the marketplace.

ESG (Environmental, Social & Governance) finance attracts a growing segment of socially conscious consumers, creating tailored investment products and differentiating businesses in the competitive landscape. By aligning financial services with ESG principles, companies can foster customer loyalty, tap into new markets, and strengthen their position as responsible and sustainable players in the financial industry.

Financial services

 Banking-as-a-Service (BaaS) companies allow non-licenced companies to propose financial services without any regulatory burden and as part of the technical effort. In other words, any company can build financial services as if it were a bank without holding such licences. Multiple fintechs start their operations without any licence so that they can test and improve financial products as early as possible and then licence the project, which is considered a second step to becoming mature and reducing marginal costs.

In this context, the future role of banks stands at a crossroads as BaaS companies disrupt the financial landscape. This type of service enables businesses to swiftly develop and test innovative financial products, provide value-added services to existing customers, and create revenue streams with agility and efficiency. As a result, banks must reevaluate their position in the market, capitalising on their established reputations, customer bases, and expertise. Embracing partnerships with BaaS providers can help banks extend their reach, diversify offerings, and leverage their strengths, while embracing the flexibility and rapid innovation inherent in the BaaS model. The future role of banks will revolve around strategic collaborations and maintaining customer trust, to ensure that they remain central players in the ever-evolving landscape of financial services.