Event triggered finance is still all about the Approved Invoice

I’ve received several questions around the evolution of finance available earlier in the source to pay cycle, such as PO finance and post shipment finance (pre invoice approval), etc.

It’s like that poor small business that gets a Purchase Order from a reputable buyer and takes it to its banker and the banker says what am I going to do with that?  Few firms actively provide PO Financing (eg. King Trade Capital and Rosenthal are examples).  Doing so involves trying to control for various risks, such as changes, cancelations, verifying the order, fraud, etc.  Lenders may use a combination of buyer references and also third parties to do physical inspections.  Because of these and other risks, the cost of PO Financing is significantly higher given these various risks to control.  In addition, structuring these transactions can be complicated by having to work with other creditors.  In short, there are reasons why this space is not filled with a plethora of lenders, it’s hard work and can be risky too!

Event triggered finance is still all about the Approved Invoice.

There is little evidence P2P and Supplier networks are having success moving upstream. For both dedicated supply chain finance vendors and p2p vendors that have tried, they have met with failure.

Typically, early pay off of an invoice approved comes in two flavors:

  • The one is straight buyer risk, where the Invoice is matched by Buyer and approved to pay and the Buyer signs an agreement to pay regardless of credit note adjustment,
  • The second is contractually committed payables, whereby the invoice has been approved by the Buyer but no agreement has been signed for credit notes.

While the two points above seem similar, the difference is huge. Banks supply chain finance programs and those offered by the likes of Greensill Capital typically do the first.

I did some research here recently and found that the companies that are trying to play more upstream with inventory or purchase order data tend to be highly specialized FinTech lenders that are focused on bringing working capital solutions to manage inventory and procurement along with other value added services such as management of logistics and transportation. Their solutions tend to be highly bespoke and not scalable.

The key B2B fintech brokers and funders are still primarily focused on approved invoices and perhaps non confirmed invoices, with a few exceptions. Even with non confirmed invoices, or what is now referred to as eFactoring, the industry is in its infancy.

There are also a few exceptions of P2P networks that can manage direct material spend – Nipendo and GT Nexus are two examples. Therefore any financing coming from networks typically impacts only the indirect procurement suppliers. With few exceptions, P2P vendors can not handle the complexities of direct material or capital expenditure spend. Most ordering is done with ERP/MRP or special ordering.

GT Nexus is a vendor that does preshipment finance through local Asian banks sitting in the country of the exporter. They were able to do this because the original TradeCard platform included overseas banks as part of the extended network. This reduced the huge costs in onboarding, KYC/AML, and supplier due diligence. They have never released figures but the solution seems to produce results for certain geographies and specific industries – including footwear, retail, and others. They have also recently announced a partnership with HSBC. The offering is initially being made live for HSBC customers based in the U.S.  Time will tell with this initiative, as banks are betting on many horses in many races.

But the question remains, how can we accelerate this movement to event based finance that has long been talked about? While the industry has made great progress around approved invoices, the fact remains secured lines of credit tied to collateral such as receivables and inventory remain the dominant form of working capital for many non investment grade corporates. Many banks are held back by restrictive Credit Risk policies (secured lending focused, etc.) plus departmental silos not educated to sell and market supply chain finance solutions that impact the middle market companies supplier or customer ecosystems.

Companies that are not strong credit, ie, those that are not investment grade, require collateral (hard assets, receivables, and inventory) to secure lending facilities. These facilities are not being used to pay suppliers early.  What some banks are doing is some variation of a dynamic discounting programsfunded with a buyers secured working capital line.   Or they may put a payable finance structure in place for 3 or 4 key suppliers under a secured working capital line.  But many dont have the FinTech relationship or AP automation tools to do this at the regional bank level.  And again, these tend to be opportunistic, not part of someone championing this in the institution.

But event triggered finance? That so far is left to the specialty lenders and FinTech crowd.

Global Business Intelligence is conducting market intelligence here to discover how financial service providers and specialty lenders are creating middle market supply chain finance solutions and how banks are addressing opportunities here. 

For those interested in the current research, contact me at dgustin@tradefinancingmatters.com

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