Supplier Networks and Factors – Not a Match made in Heaven

Michael J. Clain is a lawyer with Windels Marx Lane & Mittendorf, LLP and focuses on the structuring, negotiation, and documentation of a variety of credit products, including broadly syndicated corporate loans, asset-based loans, cash flow loans, trade and supply-chain finance, the purchase and sale of individual loans and loan portfolios, and the workout of troubled assets.

E-invoicing is big business and is growing rapidly, but the business model has a significant flaw: it’s hard to make a buck in that space. Buyers are willing to embrace e-invoicing solutions so long as they promise immediate cost savings – but those savings are generally limited to reductions in personnel and technology costs, which aren’t sufficient to support the capital costs of building a supplier network and the expense of on-boarding buyers and their suppliers. Suppliers – especially SMEs - are reluctant to pay for e-invoicing, causing some of the larger networks to offer their services free to suppliers to increase volume.

Operators of supplier networks are fully aware that they’re not going to be able to make money simply by facilitating communications between buyers and their suppliers. What they’re doing is racing to build platforms on which a variety of revenue-generating services can be provided to large networks of suppliers.

Financing the billions of invoices processed over the networks annually seems like low-lying fruit and several operators have started raising money in the capital markets or seeking partners to do just that. At first blush, factors, who are in the business of financing receivables, would seem like a perfect match for the supplier networks. But first looks can be deceiving.

Factoring consists of several distinct services: receivables monitoring and collection, credit assessment, payment guarantees and financing. Factors charge relatively modest interest rates for financing, rates that are generally consistent with bank rates for credits of comparable quality. Their largest profits come from the factoring commissions they charge for the other services.

Supplier networks simplify the process of monitoring receivables and collections (in fact that’s their main selling point at the moment) and many of the buyers they support are of sufficient credit quality to make credit assessment and payment guarantees unnecessary (or to make credit insurance, which is typically cheaper than factoring, readily available). What operators of supplier networks need from factors is financing.

But factors don't like financing receivables. It puts their capital at risk and it generates relatively thin margins (with two or three notable exceptions, factors don’t have access to consumer deposits or the capital markets, so they fund themselves either through bank lines or by refactoring with one of several prime factors).

Instead of looking to partner up with factors, who view lending essentially as a loss leader that opens the door for sale of other services, supplier networks should approach small and midsized banks, which are very good at collecting deposits and are constantly looking for ways to diversify their portfolios away from real estate, and hedge funds, which are looking for yield and would find the short-term nature of trade receivables very attractive.



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