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.
Or 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.
Sanjeev Chhugani
Cenk Ipeker
