B2B Collateral Lenders – Meet the New B2B Information Lenders

Interviewer: HAL, you have an enormous responsibility on this mission, in many ways perhaps the greatest responsibility of any single mission element. You're the brain, and central nervous system of the ship, and your responsibilities include watching over the men in hibernation. Does this ever cause you any lack of confidence?

HAL: Let me put it this way, Mr. Amor. The 9000 series is the most reliable computer ever made. No 9000 computer has ever made a mistake or distorted information. We are all, by any practical definition of the words, foolproof and incapable of error.

2001: A Space Odyssey

In the movie 2001: A Space Odyssey, HAL the computer has the capacity to feel and perceive, and was the 60s version of artificial intelligence.

When I look at where the world of lending is today, I see two worlds, the traditional collateral lending world, and HAL’s world, or the world of information finance.

Collateral lending has been around forever (Jason Busch likes to joke factoring is the second oldest profession). Assets used can include inventory, receivables, and fixed assets.  These loans can be used for factoring, purchase order financing, real estate financing, inventory and floor plan finance, and even equipment leasing.   Commercial finance loans will bear a direct relationship to the amount of collateral available. Many players are in the collateral lending world, including domestic and foreign commercial banks, small and large independent finance companies, factoring organizations and financing subsidiaries of major industrial corporations.

Collateral lenders treat repayment from the seller as their primary way out of a loan, with collateral liquidation as a secondary method in all cases.  As repayment comes from the Seller, or from liquidation of collateral which requires seller cooperation, ABL shops do not want other providers involved in the same tranche or asset class. A key concept of collateral lending is collateral valuation and monitoring that value over time.

Compared to new forms of lending off of B2B networks, collateral lending is much bigger. But Hal’s world is still early days   In fact, we are now into what I like to call the “creative destruction” period merging P2P and B2B networks with finance.

Make no mistake, there have been stops and starts in the last few years. Just to name a few:

  • Mergers & Acquisitions (eg. so many in the SaaS world Oracle-Textura, Sovos-Invoiceware, etc.)
  • Deeper partnering initiatives with non bank providers like Greensill, Seaport, Arrowgrass Capital, etc.
  • Deeper vendor partnering initiatives (eg. SAP-Ariba and PrimeRevenue, Basware and Demica)
  • Bank partnering models (eg. Tradeshift-HSBC)
  • Financing rounds at high multiples (e.g., Taulia and Tradeshift)
  • Card processors tying into B2B networks and supplier networks (eg. American Express & B2B, Discover-Ariba, Mastercard-Basware)
  • Successful IPOs (eg. Coupa)
  • And of course vendors reinventing from failed experiments (eg. Tungsten)

Where are we heading with B2B Informational Lenders?

The opportunities to work with various partners (e.g., eProcurement, e-invoicing, AP automation, invoice auditing, supplier management, group purchasing organizations, etc.) to effectively intermediate credit, whether domestic or cross border, is big.

One only has to look at the size of transactional values going through networks like Coupa, Ariba, Taulia, GT Nexus, and many more.  Values are in the billions, or even trillions.

Trade Financing Matters sees several areas that have big potential:

1.      Sector specific SaaS (Cloud) platforms are making inroads in working capital solutions.  Industries like Construction, Healthcare, Transportation and Retail have billion dollar SaaS networks that are on the verge of offering some rather curious solutions that we believe have got a fighting chance at crossing the chasm.

2.      New underwriting techniques are being developed off the back off network data that use API driven data extracts, artificial intelligence, and a decision engine to change the lending game.

3.      B2B Marketplaces and lending solutions are being pushed hard by card processors and others.

4.      Trade Finance strategies and partnerships are happening between both logical and odd couples (expect more of the latter this year).

5.      Infrastructure needed to support this from APIs to Low Code environments to Artificial Intelligence is finally maturing.

The Opportunity

There are huge issues around finance and networks, such as the different type of expenses networks process and data access and privacy.

But the big opportunity could be the suppliers that are onboarded to these various propositions. These early pay vendors are not doing any underwriting of the buyer or its’ supplier base.  The suppliers’ onboarded to these solutions may only have 2% or 10% of their receivables available for early pay, but what about the other 90%?  Can you complete the relationship?  The answer is yes, of course, the right combination of fast data, artificial intelligence, APIs, etc. is leading to new opportunities in working capital products.

Stay tuned!

If you would like to learn more about this space or exchange ideas, feel welcome to contact me at dgustin(at)globalbanking.com

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