Over the past month, we have looked into two working capital finance solutions: traditional bank programs and P-cards. As the third part of our four blog series, this time around, we will focus on financial technology (FinTech) platforms that facilitate accounts payable programs. Like the previous two evaluations, we will look at fintechs across five factors:
- Access for suppliers
- Funding stability
- Cost of capital
- Supplier Support
As cloud-based services have progressed, financial technology (FinTech) companies that act as intermediaries in facilitating transactions between a company and its supplier have emerged. In theory, they enable both the buyer and supplier to improve their working capital by making it possible for the buyer to extend its payables and at the same time accelerate payments to the supplier.
FinTech platforms connect buyers and suppliers to banks and non-bank finance providers. They build on existing technologies, such as accelerated delivery and onboarding of suppliers’ invoices in a variety of forms (direct from other financial software solutions, images, .pdfs, etc.) allowing the platform to be a single source of truth for invoicing and financing data.
It is important to note that FinTechs do not fund their own programs with buyers and suppliers. They simply provide a marketplace or the technology rails to facilitate transactions funded by bank and non-bank capital providers.
Since FinTechs rely on banks to provide capital to fund their supply chain finance programs, they are limited by bank financing rules and processes. And as we talked about in the bank program piece, banks like to work with large enterprise customers and are averse to underwriting debt for smaller businesses. For buyers that do participate in these programs, financing is limited to their largest suppliers (the top 10-20 percent of spend). This results in excluding mid-market companies – the bulk of the supply chain and the suppliers who could benefit from an SCF program the most.
Many FinTech supply chain finance use a marketplace model for connecting buyers and suppliers with financing providers. Through the marketplace, companies can gain access to a wide range of financial institutions and sell invoices directly to investors, including banks, hedge funds, and private equity firms. In such a model, the suppliers and buyers can choose a potential funder among investors registered on the platform and based on the specifics of the transaction, geography, and price. The capital provider can also agree or disagree on finance specific transactions. The marketplace can also work as an auction, allowing various investors to bid and participate in the invoice auctioning.
While this may sound like a great deal of flexibility for participating companies, it also carries a great deal of uncertainty. Invoices may go unfunded because they are not attractive to a funding provider or an auction may generate funding at a higher cost to the buyer and/or supplier. Many times, companies aren’t certain if an early payment will be available and there will be no predictability as to when cash will be coming in.
Cost of Capital
Once again, the marketplace model rears its head vís-a-vís cost of capital when working with a FinTech supply chain finance program. While the competitive nature of the marketplace can drive down cost of capital, it’s very uncertain and can be influenced by day-to-day shifts in micro and macroeconomic factors. For instance, in an environment with rising interest rates (like we are seeing as of this writing in June 2022), the cost of capital within the marketplace will increase. When invoices go to auction, buyers and suppliers are at risk if the transaction doesn’t draw significant interest to drive the cost of the early payment down.
This is where FinTechs shine. Technology is in their name. The companies behind the platforms are the ones who build the platform; that is where their expertise lies and energy is spent. FinTech supply chain financing programs often integrate with buyers’ and suppliers’ overall financial tech stack, including enterprise resource planning (ERP), procurement, accounts payable and receivable automation, and core bank systems. These integrations lead to simple reconciliation, reporting, and data analysis. FinTech platforms will also have intuitive, easy-to-use interfaces for both buyers and suppliers accessible from desktop, mobile, or apps.
Since FinTechs are only supplying the rails for the transactions, they also provide a good option for companies looking to implement a dynamic discounting program.
When it comes to how well FinTech supply chain finance platforms support supplier onboarding and use, we see a mixed bag. Some do a good job of helping suppliers implement the program and provide technical support. But the largest drawback of FinTech-led supply chain finance is a lack of support and outreach to teach suppliers about the benefits of participating in the program and getting started. Within that, many FinTechs do not help suppliers plan for onboarding or prioritizing when to onboard each tier of supplier. This often leads to a haphazard implementation that doesn’t allow the buyer to realize a noticeable working capital lift until two or three years into the program – if ever.
When it comes to ease of use and integrations with existing technology solutions, FinTechs lead the way among supply chain finance solutions. However, the funding model leaves a lot to be desired and can lead to higher costs and unpredictable and inconsistent cash flow – both representing death knells for companies trying to maximize working capital.
Come back for our final installment of our working capital solutions series when we will compare the LSQ solution to bank, P-card, and FinTech programs.