TradeShift Announces Deal with CapitalAid: “$3B” For Supplier Financing Through E-Invoicing Network
This post was jointly authored by Jason Busch and David Gustin.
Earlier this week, Tradeshift announced it was collaborating with a new organization, CapitalAid, to create additional liquidity on the Tradeshift network for early payment discounting for suppliers transacting over the platform. The full press release is here. We are still waiting to ask a number of questions we have for Tradeshift and the founders of CapitalAid about this news, but in the meantime, here are some of the highlights of the announcement:
“Tradeshift, a platform for all business interactions, announced a new deal with CapitalAid to launch a $3bn factoring business to help ease lending to SMEs. The deal will fund B2B transactions on the Tradeshift platform across all of Europe with a strong focus on the UK.”
“The CapitalAid fund will be fully embedded into the platform, which already connects hundreds of thousands of suppliers to large, global enterprises such as The NHS, Lear, DHL, and Vestas — to name just a few. SMEs will benefit from improved access to cash. At the same time large enterprises will gain from building stronger, more cash solvent supply chains.”
“CapitalAid is an innovative provider of capital to small and medium size businesses trading on electronic invoicing networks. The CapitalAid service will address the cash-flow problems faced by most businesses today, by offering them instant payment on their invoices with a ONECLICK solution covering the entire approval process.”
“We want to disrupt the current credit market by offering instant cash against invoices — cheaper & faster than any bank can do today. The simplicity and instant nature of our product will remove the risk, time and hassle of going through the lengthy form-based credit approval processes required by banks. By using CapitalAid to improve cash-flow, our customers can instead focus their time on sustaining and growing their businesses.”
CapitalAid: New, But Not New
CapitalAid is not a brand new venture – it was launched earlier this year – even though the timing of this partnership announcement comes on the heels of the Tungsten/OB10 news announcing the combination of a bank with an e-invoicing network, among other elements (see Spend Matters coverage here, here, here and here). Our industry network suggests that there are more attempts to come to bridge the financing/banking and eProcurement, e-invoicing, purchase-to-pay, and supplier network worlds.
Tradeshift’s CEO, Christian Lanng, has a reputation in the market for being an outspoken competitor (see: “Ariba Doesn’t Have Customers, It Has Prisoners”). And one of his investors and mentors in the Tradeshift business, Mortend Lund, who is actively involved in CapitalAid, also has a reputation for being an outspoken and tenacious entrepreneur who has seen good times and bad. Mortend is someone who knows all sides of the start-up world (including co-founding Skype.)
Yet it’s one thing to put out a press release and announce liquidity through a supplier network that supplements or attempts to disintermediate traditional factoring models. But it’s something else entirely to drive volume and scale (as attested to by the low adoption levels of Ariba/SAP’s financing solutions via their network).
This is Complex Stuff
Moreover, the world of trade credit and supplier financing is complicated, with numerous solutions and options to sort through. These include p-cards, dynamic discounting, static discounting, asset based lending, reverse factoring (also known as supply chain finance), bank payable management systems (e.g., electronic invoice, presentment and payment [EIPP] tools, credit risk management, purchase order management, open accounts, letters of credit, etc.), and payment mechanisms (e.g., cross border, FX, remittance, and tracking).
Add to this complexity the legal (UCC, UCP, SWIFT, etc.) and regulatory (AML, BSA, Compliance, Basel Capital Standards, etc.) environment, and things get even more challenging to go from putting out press releases to driving scale and volume on a consistent basis.
And of course this says nothing for who is behind the money in financing and factoring arrangements. While many talk about the increasing interest in hedge fund money to fund trade transactions, the fact is hedge fund managers are typically compensated based on a 2% fee for assets under management and a 20% gross return (although these norms are coming under pressure; see a recent WSJ article on the topic for further reference).
Hedge Fund Math: Does it Add Up?
Let’s do the math on this for a minute as it applies to the receivables financing environment. Take a fund with $500m in assets under management; it would receive a $10m fee plus 20% of the return. A fund like this is not interested in going after 4% or 8% yielding assets. They will buy equity tranches of structures (take Sealane as an example) to give their investors double-digit returns (say on 15% they will take 20% of the 15%, so investors receive 11% per annum after expenses to the fund), or take first loss interests in trade portfolios.
Given this example, there are a couple interesting developments to watch here, in discerning whether CapitalAid will fly or die (if indeed the money is coming from hedge funds):
1. Hedge funds are interested in scale. So can a platform like Tradeshift, which works with thousands of SMEs, generate scale on a consistent basis?
2. Will Tradeshift and CapitalAid ultimately be held hostage to hedge funds? The key question is whether they will commit capital. Remember, hedge funds get redemption calls. One minute the money is there, the next – who knows.
But on an even more foundational level, as more vendors look to the hedge fund market for funding, we must ask the question: Are times really changing or have vendors not figured out how to work effectively with banks?
Of course the challenges of making vendor and bank relationships work over the years say little about the Tradeshift and CapitalAid tie-up. Yet creating liquidity in trade finance – especially liquidity across the long tail of small and medium-sized suppliers – is not yet a recipe that other vendors have cracked. And that’s something we should all factor into account when sizing up the market potential alongside its challenges.
For further analysis of this market, see also:
Disclosure: OB10, Tungsten and Tradeshift are clients of Spend Matters or Spend Matters affiliate companies.
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