Can Transactional Finance Provide Valuation Bumps to P2P Tech Companies? (Part 1)

I have been asked countless times about how vendors get compensated when they enable finance. The question typically goes, “How does Taulia or Basware or C2FO make money off finance?”

The answer is not so simple — an implementation fee, a subscription fee and perhaps a 20% to 25% gain share on the income earned. Who knows? What you really need to understand is who should get compensated for risk and what’s the value of information to funders. For many banks that have funded vendors, the value on the approved invoice is the integration work that vendors have already done.

For many models, vendors have moved beyond proof of concept with transactional finance on their platforms and are generating good flow. The problem with vendors being the pipes or enablers in these transactions is that, unless they are providing true skin in the game in the form of capital — most aren’t — or providing information beyond a buyer approved invoice, then most funding providers find it hard to provide significant gain sharing in the finance game. If the program is being self-funded, the corporate already has paid implementation and other fees, and continues to pay some subscription fees. Why should they gain share with the vendor in their self funding? Companies say, "We take risk, we pay suppliers. It’s our suppliers and you are just selling me a module. Name me a price, but don’t talk about gain sharing the discount." If a third party does it, the customer will ask the third party for some rebate. It gets harder to split three ways.

But if you are providing more information to the funder to help them do non-confirmed invoice finance, this is where it gets more interesting. See my post last week, Why Non Approved Invoice Finance may be the Holy Grail for Vendors.

If you are only providing external data I can already get on the supplier — think D&B — that’s limited value. But if you are able to take a 50 or 200-line purchase order, with multiple shipments per line, and order changes, to be able to understand risk and financial risk of this invoice, that is of tremendous value. How much is that worth to the funding provider? It’s not zero. And if the funders can use the information to build an underwriting model to scale investing, I would say it’s worth quite a lot. The trick, of course, and it’s a hard one, is to get both the demand and supply out there. But that will come in due time as we continue to move to a digitalized world. The real question then becomes, "What value does each vendor provide in terms of information?" And here you will find big differences, but differences which may not be noticeable to most who look at purchase to pay as a holistic model.

So while transactional finance is great, the value to the vendor, and hence their valuation, depends on the above. We only have to look to The Receivables Exchange small business solution —the online factoring model for small business was a trail blazer back in 2008, but it shut the program in March 2013 — to know it’s hard work.

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Please contact me at dgustin [at] tradefinancingmatters [dot] com with anything you would like to share around this space. And don't forget to follow David Gustin on Twitter @TFMatters

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