Archive | June, 2012

Connecting To Cash: Keys To Unlock Working Capital

20 Jun

Life as an entrepreneur trying to reshape commercial lending is far from boring. Trying to understand what will make commercial lenders finance a business. Figuring out why a business waits until they have a critical cash need before acting.

puzzleOr for that matter, what about their previous lending experience discouraged the businesses from talking to a bank. Is a private loan from a P2P what businesses are really looking for, or is it that commercial lending channels just seem too hard? What would a business have to have gone through to be attracted to selling its invoice on auction to the highest bidder?

As business, we tend to grapple with some common questions thinking working capital and financing:

  • “How can I confirm I will be paid, and when will I get paid?
  • Will I jeopardize my customer relationships?;
  • Am I building on-going commercial relationships that help me expand?
  • What funding does my current situation allow?; 
  • Am I talking to the right lenders?; and
  • What are my choices ?”

So far, I think commercial financiers still have the best shot at making the cash flow. Businesses that are waiting to get paid, or looking for cash to fill a big order. These businesses are the ones that Bilbus is best able to help either get paid faster, or borrow smarter.

During the credit flood, bank lending crowded out invoice finance. As one mid-size US banker put it, “ its easier for us to give the business a secured loan than to do all the work needed in an invoice financing”.  Today, with wholesale funding markets (what allowed banks to lend cheaply) contracting, invoice finance’s 300 year+ simplicity will be what makes SMB cash flow. Or that’s what I believe.

As corporates take longer and longer to pay suppliers, the risk is that the suppliers will be unable to sustain supply, or even worse, go out of business. Enter Supply Chain Finance (SCF) which has traditionally been set up by the corporate in partnership with a bank.

The bank would lend to the supplier based on an invoice approved by the corporate, thus making it easier for the SMB supplier to obtain credit based on the borrowing capacity of the borrower.

Unfortunately, credit capacity is a big hurdle post 2008 and many large corporates have found banks less willing to set up inexpensive conventional SCF programmes for them.

In addition to the corporates own borrowing capacity, banks are also concerned with concentration risk (effectively, a bank cannot place more than a percentage of its overall lending with any one customer). Combining this with the work needed to set up a conventional SCF programme, take up has been lower than the industry envisaged. That is changing, with e-invoicing.

SCF, in its broader sense, does not have to be buyer-driven. If the buyer’s (corporate) balance sheets are stretched, or the lender has concentration risk concerns, the lender focuses on whether the borrower (SMB) is able to service the debt by looking mainly at two factors:

  • How this business is performing overall and whether it has the right level of sales and collections to sustain its obligations/grow (this is where the invoice approved by the buyer and the sustainability of the supply relationship between the buyer and borrower becomes the primary concern; and
  • In the event that this business defaults, whether the business has any other assets / collateral to cover the debt, or will the receivables balance be the sole means of repayment The lender has to take a view that the corporate will pay the invoice at the due date, else for businesses that do not have extensive collateral, the chances of securing credit are low.

A recent white paper co-authored by Bilbus summarises the opportunity to make commercial lending and borrowing easier by using e-invoice data.

Many businesses may not wish (or be offered) to pursue buyer driven financing – a collaboration between invoice providers and working capital platforms/hubs could be the solution. Today, given the propensity of open account trading, domestic and export businesses can make use of the working capital hub.

e-Invoicing allows businesses to get paid faster, track their receivables status and work out when they will need cash, and strengthen their credit case.

In the UK, the e-Invoice Advocacy Group is currently engaging the public and private sectors on the benefits of e-invoicing, a major one being liquidity and access to finance.

e-Invoicing may in deed be the key to unlocking supplier (SMB) working capital. And the locksmiths that design these keys will be supply chain financing partners and the working capital hubs (that’s Bilbus!) who combine simplicity and financial choice with SMB focused functionality.

A copy of the white paper published by Bilbus  can be downloaded from the Bilbus site.

Bilbus is a working capital financing hub that helps small businesses invoice, collect and match to commercial lenders via a single dashboard. We help businesses use invoicing and collections data to increase cash flow visibility and strengthen credit applications. Get paid faster, borrow smarter: e-Financing for the e-Invoicing generation.

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Revenues Fund Working Capital, Not Equity!

15 Jun

Short term needs are better financed by short term capital. Equity is better spent on building a business, not bridging cash flow.

Craig, the founder of a Bay Area mobile media start-up neatly summarises something we observe across many early stage tech businesses. ‘”We approached x bank (a well known bank in the community) to fund cash flow gaps and we were told we did not have enough collateral. We are not raising another equity round for some time and need some cash to cover us until our major invoices are paid”. Craig is not alone. Within the scary stats on the lack of SMB financing being produced by the public sector lobby groups and think tanks, technology companies are part of the under-lent.

Except that many VC backed companies either rely on their equity rounds or are able to access venture debt (where the strength of the VC opens the door to borrowing).

Chris, the CFO of a SaaS business has a slightly different story. “Our customer is supposed to pay us monthly in arrears against invoice, so we are on effectively 60 days. We’d like to explore the possibility of getting an advance against 6 months of invoices”. We talked to a bank who wanted to tie us into a 2 year contract and have our shareholders guarantee. Our shareholders are not too happy about this.”. In Chris’ case, he has enough working capital to last his 60 cycle – he wants a cost effective way (without diluting further) of using his sales to give him 6 months assured cash flow.

Corporate accounts payable cycles seem to be getting longer. Reports abound of corporates hoarding cash, and anecdotes of CFOs and treasurers looking to squeeze additional returns on their margins are commonplace. Corporates are worried about further reductions in bank lending, so hold their cash. The zealous treasurer extracts opportunity from his procurement – offering to pay suppliers in less than the agreed 90/45 days, the treasurer gets a discount. So, to get paid in less than 90 days, you as the supplier offer your customer a 2% discount on your sales. Great, its ‘standard’ and everyone’s doing it. So if we’re willing to ‘borrow’ from our customers (the irony of this never ceases to amaze me), why is paying a third party lender the same or slightly more, a problem?

Some suppliers look at this as a cost of sales. Others compute this as part of cost of capital. For those people lucky enough to dodge multiple corporate finance courses in college, I’ll spare the detail except to say that both cost of equity and cost of debt matter and entire armies of finance types in the banking, investment and business world spend a lot of time (sometimes too much) analysing this.

To SMBs, early stagers and start-ups, the cost of capital matters in a simple way: if you raise equity at a low valuation, you have a high cost of equity. If you pay too much for debt, you have a high cost of borrowing. So,rather than pay high interest on debt, is it not simpler to just use equity investment to finance your cash flow gaps/

If you have no choice, absolutely, wherever you can find the money. Equity is for building the business. Longer term debt can be used for that too. But for working capital short term cash or surplus revenues should be used.

If one can borrow, even at a slightly expensive rate (not so high that repayment burdens your business but high enough that it annoys you), it’s worth considering the following:

  • equity investors look for double digit or X returns. Whether its a 25% or multiple, its more than base +2-10% many commercial lenders can charge
  • debt interest can be offset against tax, equity in general, cannot;
  • equity finance dilutes ownership, debt does not;
  • corporate financiers will tell you that equity capital should be deployed on mid-long term projects since the benefit of these projects will can yield sufficient return;
  • good borrowing can lead to better borrowing – establishing good credit history can lead to better creditworthiness, which over time, leads to lower price paid for debt. Many blue chip corporates borrow below prime or close to it;
  • conventional loans need the big C (collateral). Commercial debt is often asset based (i.e. on the strength of invoices, orders or assets). A small business with invoices payable by big customers can borrow on the strength of invoices and sales without having to be constrained by lack of collateral.

I think that working capital financing costs must be looked at in the same way as early pay discounts – this is really a cost of sales. You’ve already sent an invoice and expect payment in x days. Problem is you cant wait x days. You can either dip into your equity financing for this, or find a commercial lender to bridge the gap. By borrowing commercially you are taking advantage of the tax shield while building up credit. All businesses need cash throughout their lives. Venture backed, private equity backed or listed on NASDAQ, everyone needs to fund working capital and cash gaps.

And cash comes from building up good credit and payment histories, from developing lender relationships to help fund that next big acquisition or expansion. Corporates have finance and treasury teams and relationship bankers to make this happen. Small businesses now have Bilbus.

Bilbus is a working capital financing hub that helps small businesses invoice, collect and match to commercial lenders via a single dashboard. We help businesses use invoicing and collections data to increase cash flow visibility and strengthen credit applications. Get paid faster, borrow smarter: e-Financing for the e-Invoicing generation.

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Xero In To Commercial Finance

7 Jun

The Bilbus Working Capital Financing Hub now connects to Xero!

Bilbus now integrates with online accounting software service Xero and can be found in the Xero Add-on section as well as the Bilbus Xero page. Bilbus allows Xero users to track invoice collections status and connect to matched commercial lenders.

We continue to grow our base of commercial lenders (US and UK for now, but watch this space!) and will be offering Xero users in these markets the ability to unlock financing using their invoices. Bilbus has lenders waiting to receive financing requests via Bilbus, and we will be gradually adding more lenders over the coming months.

Many businesses are not ready to look for financing, and are more concerned with tracking invoices and getting paid. As business owners, we understand the importance of cash flow and collections and we’ve designed Bilbus specifically for growing businesses. Businesses can start using Bilbus straight away, creating and sending invoices and forecasting cash flow. Today, you can create invoices (or upload them into Bilbus) and track them. Whether you use a spread sheet or accounting package, you still need to manually update your cash forecasts when you finally get an answer from your customers. Bilbus makes that easier, allowing customer status updates to show up directly in your cash forecasts in Bilbus.

While still in beta, using Bilbus wont cost a penny, and once you have used Bilbus for a few months,  you’ll be pleased with how little Bilbus will cost going forward. We’ll be offering promos and discounts as a thank you for using Bilbus to manage working capital, so there are even more reasons to get signed up. Bilbus helps a business’ accountant too, so ask them to sign up for free.

We look forward to simplifying working capital for you. If you have any problems or queries when using Bilbus , send us a quick note from any page in Bilbus.

Bilbus is a working capital financing hub that helps small businesses invoice, collect and connect with commercial lenders via a single dashboard. We help businesses use invoicing and collections data to increase cash flow visibility and strengthen credit applications.

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