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Wholesale Finance | How It Works
Wholesale finance is how big businesses and financial institutions fund major projects, smooth business cash flow, and expand their operations. Rather than being a single product, wholesale finance is an umbrella term for many different products and processes that move capital on a global level, driving development and growing economies worldwide.
Contents
- What is Wholesale Finance?
- The Wholesale Finance Chain
- Technological Advances in Wholesale Finance
- Obtaining Wholesale Finance with Clifton Private Finance
What is Wholesale Finance?
Wholesale finance represents a range of products designed for efficient business-to-business capital transfer. In contrast to more familiar retail finance, which deals with smaller-scale funding for smaller businesses and individuals, wholesale finance encompasses much larger sums of money.
This requires a range of advanced systemised and technological measures to mitigate risk, spread the load, and provide adequate security.
At its core, wholesale finance is about moving large amounts of capital efficiently. This funding moves through the financial system, from the larger banks and institutional lenders, being divided and repurposed until it makes its way to businesses and consumers in the form of lower-value loans and financial products, such as commercial mortgages and credit card funding.
Some examples of wholesale finance include:
Interbank Lending
This is when banks borrow from one another to balance their liquidity and ensure that have enough on-hand cash to meet their day-to-day needs. Wholesale finance on this level helps banks run smoothly, maintaining their short-term cash flow without disrupting their services to customers.
Warehouse Finance
Warehouse finance and its cousins, inventory finance and showroom finance, are forms of warehouse financing that leverage current or future inventory as collateral for large-scale funding.
Structured Finance
A top-end financing solution that leverages debt-based assets such as mortgages or credit cards to fund further expansion or specific projects, structured finance provides capital for banks and lending institutions through managed risk-spread investment.
Read some of our latest case studies to see what we can achieve at Clifton Private Finance:
The Wholesale Finance Chain
Wholesale finance supports the global financial structure, forming a chain of smaller and smaller funding solutions that are spread to end customers:
Global banks and institutions investors - At the start of the chain sit the larger banks and large-scale investment institutions, such as pension funds and hedge funds. These invest into structured finance solutions, such as CDO (Collateralised Debt Obligations) and MBS (Mortgage-Backed Securities).
Smaller banks and lenders - Generating income from these wholesale finance solutions, banks and lenders then distribute the funding as retail finance solutions to businesses and individuals. These take the form of:
- Mortgages
- Credit Cards
- Overdrafts
- Unsecured Loans
- Asset Finance
- Business Loans
- and more…
This dilution and spreading of the funding doesn’t typically happen in one or two steps, but involves a chain of multiple institutions bringing together funding from multiple streams, leading to complex packages of wholesale finance solutions that draw on several lenders to obtain the required level of capital at each stage of the chain.
The Dangers of Wholesale Finance
Wholesale finance is very powerful, but it also comes with significant risks. The scale of the lending means that banks and investors are more exposed to market forces. Furthermore, the complexity of the financial packages that make up the chain of wholesale finance can be difficult to unravel, making an accurate risk assessment all-but impossible.
In the years leading up to 2008, especially in the US, banks and financial institutions leant heavily on wholesale finance to fund mortgage lending. Subprime mortgages were eagerly offered to end customers without the level of oversight and stress testing that exists today. With high interest rates meant to balance the risk, they were seen as potentially extremely profit-making for the lender and sold without due oversight.
These mortgages were bundled into complex CDO wholesale finance solutions, themselves repackaged into more CDOs, creating an opaque layer of financing that hid the true risk of the investments. This led to structured finance packages that presented as AAA-level low-risk, while in truth they were far less stable.
Mitigating Risk Today
In the wake of the 2008 crisis, solutions were put in place to make risk assessment more reliable and add greater transparency to wholesale finance solutions.
While Basel III ensures a more stable global market for wholesale finance, it does mean it is harder today for businesses to access large-scale funding than it was a few decades ago.
Technological Advances in Wholesale Finance
Embracing new technologies, such as AI and blockchain, means that wholesale finance is evolving, changing the way businesses can access large-scale funding:
- Artificial intelligence and machine learning improve risk assessment, providing automated underwriting and fraud detection. This is creating a platform where loan approvals are significantly faster.
- Blockchain and smart contracts provide security and transparency that rely less on intermediaries for financial transactions. This is another technology that makes the application process faster, as well as lowering fees and providing additional security for all parties.
- Digital platforms mean businesses can access their wholesale finance solutions in real time, able to control and adjust funding without requiring multiple levels of human interaction.
At Clifton Private Finance, our wholesale finance team work with lenders who embrace these cutting-edge technologies, ensuring you are offered modern funding solutions that better fit your need.
Obtaining Wholesale Finance with Clifton Private Finance
Securing wholesale finance isn’t as simple as applying for a loan. It can be a lengthy process even with the advantages of technology. Lenders want to see a solid business model that presents a strong financial position and clear risk management strategies.
You will need to detail a comprehensive business plan that has reliable forecasting, a strategy for scaleable and sustainable growth, and a detailed presentation of your assets that can be leveraged as collateral. While it is possible to approach banks or institutional lenders directly, wholesale finance deals are complicated and specialist support is recommended.
Get in touch with a specialist at Clifton Private Finance today to discuss how we can secure the perfect wholesale finance solution for your business’s future.
