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Anatomy of a Deal: Participations
By Gen Merritt-Parikh
Just as important as those alternatives, we also offer a participation program for factoring, asset-based lending, and other collateral types to provide even more flexibility to companies in the specialty finance space. Participations are a powerful (and sometimes overlooked) part of the funding mix for specialty lenders. To successfully employ participations, it takes a reasonable tactical plan with true collaboration, where each party has clearly defined roles and expertise. Even with the collaboration required to successfully utilize participations, they should not be omitted from your financial toolbox.
Interestingly, participations are a lot like the team working together in Ocean’s Eleven. Each player’s role is intertwined, and without collaboration, the mission would fail. Most importantly, it’s not simply about the goal (or the mission, or the deal in this case), but equally as much about the people involved in that partnership and their funding philosophies. For those unfamiliar, participation financing is a mechanism for lenders to manage concentration exposure and maintain a diversified portfolio. Collaborating on a deal has the added benefit of extra layers of review in due diligence and ongoing monitoring, further reducing risk.
It always helps to talk through a real-world example. In one purchase order participation, a distributor of hoverboard and toy products faced a unique challenge. They received large holiday orders from one existing, creditworthy customer. To meet the demand and grow their business, they needed to access working capital almost double the amount of their $40 million bank line of credit. Clearly, the existing bank facility was insufficient for the amount needed, and timing constraints (the holiday season) posed urgent challenges to execute their plan. (As an aside, it helped that the company had a long history in business, as well as strong relations with their key customers and vendors.)
To bridge their funding gap, the company sought assistance from a well-known and respected purchase order finance company. Even with the purchase order company’s experience, several obstacles arose to make the financing a challenging project. Given its size, this transaction represented considerable concentration exposure, as the order was from a single customer, and the deal itself was a larger transaction for the lender’s portfolio. Moreover, the products carried the risk of order cancellations prior to delivery, which could leave the lender with a significant amount of inventory without a buyer or - even once delivered and sold - rejections by end customers should product quality issues arise.
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Interestingly, participations are a lot like the team working together in Ocean’s Eleven. Each player’s role is intertwined, and without collaboration, the mission would fail. Most importantly, it’s not simply about the goal (or the mission, or the deal in this case), but equally as much about the people involved in that partnership and their funding philosophies. For those unfamiliar, participation financing is a mechanism for lenders to manage concentration exposure and maintain a diversified portfolio. Collaborating on a deal has the added benefit of extra layers of review in due diligence and ongoing monitoring, further reducing risk.
It always helps to talk through a real-world example. In one purchase order participation, a distributor of hoverboard and toy products faced a unique challenge. They received large holiday orders from one existing, creditworthy customer. To meet the demand and grow their business, they needed to access working capital almost double the amount of their $40 million bank line of credit. Clearly, the existing bank facility was insufficient for the amount needed, and timing constraints (the holiday season) posed urgent challenges to execute their plan. (As an aside, it helped that the company had a long history in business, as well as strong relations with their key customers and vendors.)
To bridge their funding gap, the company sought assistance from a well-known and respected purchase order finance company. Even with the purchase order company’s experience, several obstacles arose to make the financing a challenging project. Given its size, this transaction represented considerable concentration exposure, as the order was from a single customer, and the deal itself was a larger transaction for the lender’s portfolio. Moreover, the products carried the risk of order cancellations prior to delivery, which could leave the lender with a significant amount of inventory without a buyer or - even once delivered and sold - rejections by end customers should product quality issues arise.
Please click here to continue reading the article.
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