Using Information Advantages to Finance B2B Transactions

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This process of Creative Destruction is the essential fact about capitalism. — Joseph Schumpeter

We've all heard the stories around how supply chains are digitizing. A real transformation is underway, no doubt. But transformations don’t happen overnight.

Likewise, traditional forms of financing supply chains still dominate. Many new models of lending have emerged over the last few years that rely on the approved invoices and third-party money, and while some models have generated volume, these pale in comparison with total B2B transactions.

This is not to say there are not failures. In fact, the innovations that have been tried and failed lead to further innovation, piggybacking off of lessons learned.

Business lending is not easy. B2B lending is particularly fuzzy, given how difficult it is to assess risk for all the counterparties to a trade. This is where platforms and networks and digitization come into play. Networks contain valuable data on the performance history of buyers and their suppliers. Today, most financing is done on one event: an approved invoice. Tomorrow, financing could be done based on many events: purchase order, materials ordered, factory about to ship. Funds could be released at certain triggers.

Far-fetched? Maybe. But that is where we are moving. Many B2B and supplier networks are currently using the data contained in their network to enable funders to lend money. By using performance history data along with visibility and underwriting models, the market for “information advantaged” finance can blossom.

Will it be successful? Does big and fast data lead to better underwriting decisions?

Predicting dilution is not easy. Doing so requires both the necessary invoice data and the payment data to analyze a sufficiently large data set. Many procurement software platforms offering various source-to-pay services do not tie back the remittance data of what has been paid to what has been ordered or invoiced.

While some may think an approved invoice is good money, that is not always the case.  Post-confirmation dilution exists and can happen for many reasons, including tax liens, government judgements, insolvency or even if buyers just decide to change their minds and issue a credit memo post-approval.

But networks have transactional data that is more predictive than any other external trade credit information or any other credit related underwriting information. What’s critical is to ensure the data is transactional down to a deep level.

The challenge is to build intelligent underwriting models that can take this data and make credit decisions. There are many questions to ask, such as:

  • How to use the data contained in supplier networks to make a finance decision?
  • What data is required?
  • Does the data extend across a business cycle?
  • Does it include dispute and dispute resolution?
  • Can you actually track an invoice to a payment?
  • What risk mitigation techniques are required

Another challenge is the technology to do the securitization. This is not trivial by any means. In a low short-term rate world, interest by funders in these models are very high. Putting the above together is complicated and very hard. Finding the parties to do the algorithms to analyze the data, accountants to test the models, building underwriting models off the data, developing the right structures to invest in these flows and finding the right investors is a delicate dance. But the size of the prize is certainly big, and those who can overcome these challenges can offer rates buyers and suppliers that accommodate the risk of the transaction, backed up by historical data.

Should be fun!

David Gustin runs a research and advisory practice centered on helping financial institutions, vendors and corporations understand the intersection of trade credit, payments and the financial supply chain. This post was written while David worked on a special project with The Interface Financial Group.  He can be reached at dgustin (at)


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