Dealing with Uncertainty: Financing and Settling International FX Payments
SME businesses, partnerships and entrepreneurs are looking for new ways to transact their FX and explore their funding requirements. Linear Investments have a streamlined and workable financing solution designed to offer much more than a traditional FX option to the market. Below, we speak with the company’s Chairman Jerry Lees, who tells us more about it.
What makes Linear’s International Payments team different to other providers in the market?
Linear is a far more diverse operation than the simple FX payments providers in the market. Within Linear and its sister companies, such as Saffron Asset Finance, we can provide access to a much wider suite of financial services that will integrate with a client’s FX requirement. For example, access to SME finance including loans, factoring, forward finance, insurance cover and larger-scale corporate support for growing businesses such as capital raising and bond issuance.
FX payments as an isolated product is not good enough, as it’s merely tackling one issue faced by SMEs in today’s market. Although banks indeed charge an unreasonable rate for FX trades, this is not a strong enough stand-alone reason to provide an FX facility at Linear. International payments are just part of our solution that includes forwards, hedging, trade finance and loan investment capital. That is precisely what we, as a financial specialist and a group of partner businesses, bring together.
From the technology side, one of the key factors in differentiating Linear from other FX providers is not only the experience of our staff but our technology capabilities. As well as an online trading platform, we also offer our clients a mobile app which enables them to convert currencies and make payments whilst they are on the move.
Linear offers a corporate FX service to both new and existing clients alongside its core suite of services. Why is offering an FX service important to Linear and your clients?
The service is important to our clients as many of them need integrated foreign exchange and payments when dealing with overseas business. The FX needs to be seamless and cost-effective; that is what we deliver.
Any one of Linear’s clients may have an FX requirement. As a broker, we have a standard FX trading requirement to manage currency exposure and hedging of positions. These trading capabilities are utilised by Linear and its hedge fund and other financial clients.
For clients, it’s a real value-add as we save them significant amounts on their rates of exchange and give them an effective consultative approach. Helping them with their timing of trade execution, for example, can save them a significant amount on their bottom line.
In uncertain and volatile markets, what is the best way for clients to manage their exposure?
There are some simple rules to stick to so that you don’t have to learn an expensive lesson with your FX trades. For example, don’t try to outsmart the volatility pattern. If you see a good price, then take it. Don't assume that the price will still be available the following day. Take careful consideration to hedge your currency exposure if you have larger long-term contracts. We can help with this.
In the current market, multiple triggers could cause aggressive movements in price quickly. If you are on the right side of the recent aggressive moves, then forward contracts would certainly make sense to mitigate against adverse currency movements whether you are a buyer or seller. Just be mindful of any possible variation margin calls over the duration of your contract and how this may affect your cash flow. Also, make sure all your future requirements are certain before locking in the rate.
FX payments as an isolated product is not good enough, as it’s merely tackling one issue faced by SMEs in today’s market.
In terms of other services provided to corporate clients, can you tell us about your SME lending model?
We aim to be the ‘go-to’ funder for SME businesses and their advisers. This is a service that can integrate with our FX for larger importers and exporters. We achieve this by providing a mix of our own funding and a ‘whole of market’ solution, with access to a portfolio of other lending institutions including banks, FinTechs and independent providers.
Essentially from a client’s business perspective, they can be assured we can handle the total funding and money handling requirements of their business at whatever stage they are in their life cycle. In effect, we are taking the place of the traditional high-street bank that may have been the only option for an SME in the past. We understand SME clients’ needs and provide a service to advise and support their requirements. Our SME finance partners, Saffron Asset Finance, are gearing up to provide many of their loan services through partnerships that we have formed with local accountancy practices. These practices have an in-depth knowledge of their clients’ needs and can, therefore, assist the clients in submitting loan applications and reports.
Funding options include asset finance (including re-finance to release tied up working capital), invoice finance, bridging/mezzanine property funding and business loans. Whilst we are in a digital economy, we also offer an old-fashioned service approach by helping our customers put together credit proposals and showing that they are a good bet to lend to.
Asset-backed would mean reduced risk. How have you built downside protection into your finance book?
When lending, we are not simply looking at the value of the asset. Just because there is a good asset to provide cover if anything goes wrong, it is not necessarily the right thing to do. We are responsible lenders and as a key part of the application process, we check if the customer can repay the loan without causing damage to the business, directors or shareholders.
FX payments do not stand alone; they need an integrated approach that includes advice, potential hedging and risk management and in some cases, integrated lending and finance.
Our lending is based upon a percentage of the value of the asset. As a rule, we would not be lending more than say 75% (and often less) of the asset value and ensure that the depreciation curve is in line with the repayment structure. Asset-backed lending does what it says on the tin so there is much lower risk. A worst-case scenario is the amount of human and emotional effort it takes to sort out the problem if a deal goes wrong and the asset needs to be recovered and sold.
As a principle, we also spread our lending amongst a large number of customer types and asset classes so that we have a balanced portfolio and can sleep at night knowing that risk is minimised and our investors are protected. There are internal risk limits on our exposure to any one client, type of client and sector both in terms of percentage and absolute size of exposure.
You have also created two structured products in this regard to raise more capital; what is your overall vision for this?
As I indicated earlier, we see the requirements of SME businesses, partnerships and high-net-worth clients as requiring a one-stop-shop solution. FX payments do not stand alone; they need an integrated approach that includes advice, potential hedging and risk management and in some cases, integrated lending and finance.
In order to provide these services both from our own group resources and partners, we need to be able to deploy considerable capital. Were we to establish a bank, we would be constrained by the very restrictive measures brought in to protect the general public, and for a good reason, based on experience in the last decade. However, by raising funds from experienced investors, corporates, hedge funds and only professionally qualified investors, we can apply a more focussed lending policy that meets the needs of the SME community. These investors have the financial know-how to make investment decisions on our strategies and risk management, thereby creating a powerful source of loan capital for the market. This is an essential service now as we see many SMEs and entrepreneurs are being starved of capital from traditional sources. Our solution is designed to fit all aspects and needs of an SME business in troubled times.
Can you tell us more about the bond programme and preference share issue, and how all these elements come together?
The bond program raises capital to be directed towards the sophisticated SME corporate who needs financing that might require a deeper understanding of financial markets. By raising initially £20m of an issue of up to £100m through the Frankfurt Exchange listed bond structure, which is only geared towards professional investors, we are able to manage distribution to more complex loan structure requirements. Working in partnership with our multiple bank relationships and with many specialist private banks, we can create complex structured products with geared or partnership outcome. This is a specialist lending structure highly controlled by risk management systems.
The Saffron Asset Management preference share issue is the first of a raise to provide substantial lending capacity by partnering with multiple bank partners with whom Saffron already has arrangements. The loan book will focus on the day-to-day requirements of SME businesses and, as I mentioned earlier, it will integrate with international payments for importers/exporters loans for plant, machinery, facilities, development assets, factoring, bridging, forward purchase and stock finance. At Linear, we are in a great position to make a real difference to the SME business lending market.
About Jerry Lees
Jerry Lees has been an active entrepreneur and key to the success of multiple technology and financial businesses. He is the Chairman of Linear Investments and is also on the advisory board at Saffron Asset Management.