Why Use a Financial Intermediary?
Intermediaries have been used by businesses for centuries. Initially they were used extensively in the world of trade by bringing buyers and sellers together without the complexity of acting as either wholesaler or distributor. Over the years the roles of intermediaries have evolved into almost all facets of business, including finance, where intermediary roles can cover investment, M & A activity and debt procurement/management. The initial financial intermediaries were the banks and investment banks which acted an intermediary for the depositor by on-lending deposits at higher rates, however as the finance world has evolved, the direct relationship between the bank and client has moved beyond this simplistic activity and into regulatory compliance based delivery of services. As a result a financial intermediary industry has also evolved to become a true conduit between the providers of finance and the client.
The definition of a financial intermediary varies depending on the source. Essentially a financial intermediary works to bring a financing source or investor together with a business that requires financing. While financial brokers can fall under this definition, traditionally they don’t as they are paid by the financing source, which can cause conflicts. A true financial intermediary is ambivalent regarding the financing source and works on behalf of the client to achieve the best result.
Why would a business use a financial intermediary?
Any business which has sought commercial or corporate finance recently, will have a good feel for the complexity involved. Unfortunately, the old days of discussing your financing needs over lunch with the bank manager are long gone, and have been replaced by a time consuming process that relies on provision of complex and voluminous documentation such as:
Certified trust deeds
Tax portal statements of all entities
Copies of all existing financial agreements
Completed property/security valuations
Copies of major contractual obligations, etc.
In addition to the usual financial records, forecasts, cashflow statements etc.
Not that long ago, lenders would approve a loan based on initial financial information provided, with some, or all of the above requirements being required a conditions precedent to initial drawdown. This is no longer the case with few lending decisions made without provision of all required information at the outset.
Also, to quote a very old advertisement, “oils ain’t oils Sol”. The financing options available to businesses are no longer restricted solely to the banking sector. Debt can be procured from a variety of sources, which may include mezzanine debt, convertible notes and debtor finance to name just a few. No disrespect to the well fed bank manager, but the financial options available to them are limited to the products the bank has to offer. A financial intermediary can match the financing need with the most suitable funding product.
Few businesses have either the time or the inclination to do the financing procurement process justice. This is the sweet spot for a financial intermediary.
The Benefits of using a Financial Intermediary
While the following list is debt focused, financial intermediation for capital and M & A activities produces a similar list:
Time is money. Passing the workload of financial procurement over to an intermediary removes a time consuming obligation.
Financiers are busy also. Using debt as an example, nothing frustrates a lender more than a half-baked, unsupported and poorly documented request. An intermediary will package the proposal up, complete a detailed Request for Finance document - including risk assessment and ensure that each potential lender’s specific needs are met at the outset. This makes quite a difference when navigating the credit approval process.
Reputations matter. Well-respected referral sources are more likely to achieve positive hearings.
All lender discussion is directed to the intermediary. This filters the need for many potentially confusing requests being tabled with the client.
Specific financing preferences of various industry players are known. This filters out the uninterested at the outset.
Fees, interest rates, terms and conditions are usually negotiable. The intermediary is able to negotiate on the client’s behalf without any conflict of interest.
Confidentiality is paramount.
Conditions precedent to drawdown/settlement, legal documentation, covenant adherence and other requirements specific to the transaction, can all be managed on the client’s behalf, with minimal interaction.
Finance completed – then what?
Few, if any, financing transactions are set and forget. Usually the financiers will require annual or quarterly reporting of performance against forecast, covenant monitoring, tax payment obligations and adherence to all terms and conditions. The financial intermediary can remove this unwelcome and distracting obligation from the client and produce detailed reports that not only ensure the lender is satisfied, but paves the way for positive support as further financial needs are contemplated.
nem has a financial intermediary arm under its “Professional & Financial Services Cluster” which uses partners with many years experience in the financial sector.
To find out more, visit nem Professional & Financial Services via the link below.
Author: Gary Ayre, Lead Partner of nem Professional & Financial Services.
This article is based on research and opinion available in the public domain.