Primary finance companies and company departments may consider using an arm’s length subcontractor to handle a deal in various situations, depending on their specific needs, capabilities, and the nature of the transaction. Here are some scenarios in which such a decision might be considered:
- Specialized Expertise: When the primary finance company lacks the specialized knowledge or expertise required for a particular type of deal. For example, if they primarily focus on traditional lending but want to enter a complex derivative transaction, they may subcontract to an expert in that field.
- Resource Constraints: If the primary finance company doesn’t have the internal resources, whether it’s personnel, technology, or infrastructure, to efficiently manage a deal. In this case, outsourcing to a subcontractor can be a cost-effective solution.
- Risk Mitigation: When the deal involves significant risks or regulatory challenges that the primary finance company is not equipped to handle. Subcontracting to an entity with a better risk management framework or insurance can help mitigate these risks.
- Geographic Expansion: If the finance company is looking to expand its operations into a new region or market where it lacks a physical presence or local knowledge, partnering with a subcontractor in that area can facilitate market entry.
- Cost Efficiency: In cases where it’s more cost-effective to outsource certain deal-related tasks. This could involve tasks such as due diligence, legal compliance, or back-office operations. Subcontractors may have lower operating costs or economies of scale that the primary finance company can leverage.
- Volume Scalability: If the deal volume is highly variable, using subcontractors can provide flexibility. The finance company can scale up or down based on market conditions without committing to a large permanent workforce.
- Confidentiality: In situations where maintaining confidentiality is crucial, using an arm’s length subcontractor can add an extra layer of security by limiting access to sensitive information.
- Time Sensitivity: For deals that require swift execution, a subcontractor with the necessary resources, market knowledge, dedicated staff and contacts can expedite the process. This is especially relevant in industries where timing is critical.
- Compliance and Regulatory Expertise: In a heavily regulated industry like finance, subcontracting to experts in compliance and regulatory matters can help ensure that deals are executed in full compliance with all applicable laws and regulations.
- Global Reach: For international deals, subcontractors with a global presence can offer access to a wider network of partners, customers, and resources, facilitating cross-border transactions.
As finance departments continue to adapt to changing conditions, outsourcing specific functions, tasks or projects to specialized subcontractors could become an even more common strategy for optimizing their operations. It’s important to note that using subcontractors involves its own set of challenges, such as ensuring data security, maintaining quality control, and managing subcontractor relationships effectively. Additionally, companies should ensure that subcontracting aligns with their strategic objectives. Amica Capital is experienced in working with finance companies and corporate finance departments. If this interests you, call us today to discuss how we can help.
