Has Off-Platform Lending’s Time Finally Arrived?

“You would rather have the cash than borrow against it. No one says I would like a lot of inventory so
I can borrow against it.” — CFO in farming and mining machinery

 

More companies are required to use supplier portals offered by their customers in order to submit invoices, check on invoice status, receive early payment, etc.

Generally, a supplier portal provides a mechanism to interface, communicate and capture information between the buyer’s supplier community and the buyer’s internal organizational units, typically deployed on a software-as-a-service basis in the cloud. While no exact data exists today, industry experts estimate roughly 10-30% of companies are using some form of supplier portal technology, and many companies will work with multiple supplier portals.

Some of these portals offer early pay finance, either via dynamic discounting alone or with some third-party funding arrangement.

However, this may be inadequate for a supplier for this reason: The receivables on any individual buyer’s portal may represent just a small percentage of a supplier’s receivables book or total receivables. The supplier may be able to turn to other lenders such as asset-based lenders and factors, but with challenges for small and mid-sized companies: lenders may ask for a lien on receivables, and more importantly, only fund “ELIGIBLE” receivables, excluding concentrations, cross border and other receivables not to their liking.

Companies may need more working capital than they can get through a single portal. Here’s why: One portal may contain the supplier’s relationship with one buyer, but that buyer represents just a small portion of the supplier’s total accounts receivable. For example, a supplier selling to CVS, also sells to Walmart, Walgreens, Target, Rite Aid and others. A small $20 million plumbing operation may provide facility management services in the Seattle area to McDonald’s, but also has 300 other clients not making them use a supplier portal to manage data and document exchange.

Now, digital B2B lenders can use fast data to scour thousands of individual data points — to instantly create a dynamic credit limit for companies that work on a particular supplier portal but only have a small percentage of receivables running through it. By having an off-platform model, this company can fund as many invoices as they want until they reach their credit limit. Virtually every supplier can be funded — only those in bankruptcy or on government watch lists are ineligible. This new form of B2B lending marries two core competencies:

· Credit and underwriting expertise for invoice finance

· Rapid technology development, including big data/fast data analytics

Today, source-to-pay platforms can only offer early pay based on their platform. While wanting to do more with their supplier ecosystem, P2P's lack the knowledge to put together a more complete offering, and with the credit cycle changing, any solution not time tested can be wrought with risk.

As more platforms look to enhance their working capital offering, it should be a fun 2019. Stay tuned!

David Gustin is Chief Strategy Officer for The Interface Financial Group responsible for Digital Supply Chain Finance and a contributing author to Trade Financing Matters

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