Is There a Middle Market Liquidity Gap? Post 2

It is common to hear about Financial institutions not lending to support buyers and sellers of goods, both domestically and cross border, and how this impacts growth and job creation. The Asian Development Bank does an annual survey around this topic and estimated the gap at $1.6 trillion, especially hitting SMEs and woman-owned firms hard.

I wondered has this so called “gap” impacted the middle market in the USA and if so, do we believe there a liquidity gap in the middle market segment that can be served by various forms of early pay finance (“EPF”)? I recently completed both interviews and a survey with middle market companies on this topic, especially as digital finance in many forms is more advanced in the USA. The other interesting angle is as more early pay finance is offered to this segment, the key question is will it partially displace existing lending arrangements and lead to collateral erosion?

Treasurers now have options for early payment that they have not had before, which can enable them to inject liquidity at specific times (ie, quarter end) or adhoc (when cash is needed), or even on a more permanent basis. Many of these solutions provide an “option value” to a company, ie, the ability to opt-in when a Treasurer needs cash.

These solutions can come in many forms

Middle market companies come from all walks of life – from environmental service companies, to staffing and BPO providers to manufacturers of all types of products, to those that forge and form metals. Many of these middle market companies sell a significant percentage of their goods and or services to OEM and large enterprise customers. Many of these larger enterprises have offered various techniques to receive early payment including:

  • Buyers self-funding using third party or homegrown early payment solutions - Buyer uses own cash to retire a receivable early based on a sliding scale, ie, the earlier the payment, the bigger the discount.
  • Purchase to Pay solution using third party finance using an approved invoice from a network (eProcurement, OEM-Dealer, eInvoicing), these networks can fund the invoice with third party capital.
  • Working Capital platforms where sellers name their price of funds - suppliers provide a rate at which they will discount their invoice for early payment. This is a significant point of distinction.    Suppliers have the ability to set their own price for early payment.
  • Supply Chain finance offered by large customers using their credit rating- Solution that enables a buyer to lengthen their payment terms to their suppliers while providing the option for their larger suppliers to access funding or receivables to the buyer early based on the buyer’s credit rating.

Is there uptake of these solutions by the middle market?

Discussions with senior executives (CFOs, Treasurers, Credit Directors) at these firms about their existing capital structures and use of EPF techniques has indicated that collectively, EPF as a way of providing liquidity for this market segment is peripheral at best.

Survey Results to the Question “Given your traditional sources of Working capital how likely is it that ou will use alternative forms of finance like Early pay to fund your working capital over the next 5 years?

While various SCF, business network, and purchase to pay vendors have developed transactional finance solutions for large buyers and their supplier ecosystems, providing easy-to-access digital financial services, the displacement of existing capital options for the middle market is unlikely. What has been taking place is an option for liquidity at specific times (ie, window dressing periods), or selective use of techniques such as supply chain finance with key customers.

While supply chain finance propositions from large OEMs will continue to find take-up in this segment, other propositions will be challenged. Most companies operate under razor thin margins in manufacturing. It is very hard to pay pcard rates or dynamic invoice rates of 1.5% to 3% of invoice value. In addition, many companies have Asset Based Lending facilities at Libor + 400bps to 700bps, so as long as rates stay low, most existing EPF techniques will not be competitive other than SCF based on an OEM balance sheet.

For many in this market segment, taking a discount off of an invoice with pcards or dynamic discounting is viewed as a cost. While CFOs and Treasurers want to minimize DSO, they are not as eager to trade some margin for the cash.

If you would like a high level overview of the research, please feel free to contact me at

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