Doing the Math on new Working capital models – Where’s all the Money Going?

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Are new working capital models sustainable?

For many models, we have moved beyond proof of concept and are now trying to reach beyond burn rate to profitability. That is challenging. We only have to look to TheReceivablesExchange small business solution, which is responsible for trailblazin a new online factoring model for small business back in 2008 but shut the program in March 2013, to know it’s hard work.

Looking at various business models which involve “selling” suppliers money, vendors’ projections versus reality can be far apart.

The first challenge is when you sell money, many times using call centers -- the analogy I like to use is some investment adviser cold calling me and asking about my personal portfolio. Huh? You want to know details about my investments and we have no relationship or trust? Selling money involves negotiation-selling skills. It’s not always as simple as "we uploaded your invoice on a platform, so go get some money on an ad hoc basis."

Many vendors charge a small implementation fee, subscription fee and a 25 percent to 50 percent gain share on the income earned. If your average basis point awarded for suppliers is 40 basis points (about 7 percent APR), and you are accelerating payment by 30 days, you need tremendous scale to make these propositions work. Knowing you need scale, you invest heavily on the sale side, paying big bases for enterprise sales people who go market to the Fortune 1,000 the latest early pay technique. The burn rate is serious.

Since vendors do not publicly release their platform numbers, and there is no apple-to-apple comparisons (I could say I handle $20 billion in payments or had $1 billion offered to my suppliers), but what we want to know is how much was discount earned from finance.

We are certainly beyond proof of concept, and many vendors will find their plumbing and value added services are greatly rewarded. But like TheReceivablesExchange, which had to transform their model to a large corporate platform that comes with a different set of challenges, just because the opportunity is enormous does not mean instant success.

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