Collateral Lenders, Relationships, and New Data Driven Underwriting Models

I recently had a number of discussions with collateral lenders (asset based lenders, factors) around early pay techniques eroding their receivable base. The consensus was a collective “Huh, I don’t see that with my client base.”

Is Chicken Little running around saying the sky is falling? Certainly it’s not today. Most of these new models barely register a blip on their radar screen when it comes to their clients using new forms of finance.   There may be the odd exception or two, but it’s very early days and like Jason Busch likes to say, we are in the first inning of a nine inning game.

But what I think many of these commercial finance guys miss (lets call them Betamax) is that Netflix has been developed and just needs the proper superhighway infrastructure.

Right now, most of the vendors out there are focused on selling integration services around eProcurement, einvoicing, or business networks to the Global buy-side 2000, that is the major corporates and their supplier base. Of course many have added abilities to help their client offer some form of early payment to extinguish a payable early.

These Networks are information advantaged but relationship and operationally light compared to Commercial Finance companies. They first start with an integration project around eInvoicing, eProcurement, EDI replacement, etc. And many realize they have valuable network data, data that bankers and commercial financiers do not have that could greatly enhance underwriting opportunities, risk based pricing, loss rate modeling, etc.

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?

There is a lot of money looking at solutions here, and it’s not coming from the collateral lenders. They are still knocking on doors one at a time (or cheating, stealing names off of UCC filings, but that’s another story).   Sitting in their shoes, you may own a piece of the relationship now, but your relationship will look for options.  And there will be options. Think what this space will look like in three years.

The collateral lenders can get involved in this transition. But they struggle because incentives are not aligned. They just want to be balance sheet, and these networks want them to open up their client base. These two desires don’t always mesh well.

Now it’s time to sign up for Netflix in India.

David Gustin is currently doing some syndicated research on this topic. To learn more, contact him at dgustin (at)

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