Fed up with being paid late? Lots of small businesses are. Here come the innovators to put an end to it.
What’s the next big thing in alternative finance? Many people are getting excited about the rise of platforms that offer investors part-shares – or should we say “crowdshares” – in property, such as Property Partner (launched this week) and Property Moose.
Syndicate Room, one of the more successful crowdfunding platforms, has even recently played midwife to the birth of a real-estate investment trust (Reit) created to invest in buy-to-let. Mill Residential Reit (Aim: MRR) raised money via both crowdfunding and a listing on the Alternative Investment Market (Aim).
But I’m not sure I share this enthusiasm. We Brits are already hopelessly over-invested in houses. And I can’t see why residential property is such a good bet, given that interest rates are likely to start rising (slowly), and we’re also likely to see new housing supply rise (again, slowly).
A fast-growing sector
I’m more interested in a rather drier, more boring area: ‘supply chain finance’ and ‘invoice funding’. I know of at least three peer-to-peer (P2P) platforms already serving both consumers and businesses that are – or have been actively exploring – setting up an invoice-funding arm.
This follows the news that P2P platform Assetz Capital is launching its own invoice-finance service for small and medium-sized businesses, in collaboration with US-based The Interface Financial Group. This will give retail investors access to this fast-growing sector.
What’s so exciting about this area? It’s all about the boring business reality of getting paid late. We’ve all heard the stories by now. You’re a small business. You sell a product or a service to UK Blue Chip plc.
Its finance director knows that his shareholders like tight cash control, so he makes all the suppliers wait for cash on payment (ie, the supplier doesn’t get paid until their product gets sold on). Supermarkets are the classic example. So the poor old supplier has to wait for anything up to 120 days for payment on presentation of the invoice – all the while juggling bills that have to be paid today.
These big blue-chip corporate rogue traders would, of course, argue that they need to pay their shareholders their regular cash dividends. But they do have a few problems. The negative publicity around late payment is a PR pain, for a start. It also ties up big finance departments in constant churning of largely electronic invoices.
This is a real drag, especially if you have literally thousands of suppliers and tens of thousands of invoices. Pity the poor chief financial officer – wouldn’t it be better if some one came along, managed the e-invoice system and maybe also helped pay those invoices to needy suppliers on time? All for a small cut, of course.
Promising upstarts
Welcome to the world of supply-chain financing, which is increasingly dominated by all manner of financial-services upstarts. These range from Tungsten Corporation (Aim: TUNG) through to new companies such as Crossflow Payments and Aztec Exchange.
The latter is an Irish-based, British-conceived business that works with big multinationals that have long and complicated emerging-markets supply chains. The corporate sales pitch here is irresistible – these firms handle the payments process, and offer to pay for the funding of the constant stream of invoices.
The key risk for investors, of course, is that the firm that owes the money on the invoice doesn’t pay up. But in many cases, this supply-chain finance is based on the credit record of blue-chip Western multinationals, which often have better credit ratings than their host governments.
If you can link the technology and the financing bits of the equation together, then you have a potentially huge business. That’s why investors have put extravagant values on the likes of Tungsten – it’s valued at more than £230m, even though its share price is now back where it was last year when it first floated (at around 232p).
Given the pedigree of its founders (including Edmund Truell, who helped set up the successful pensions buyout firm Pension Corporation) and its technology prowess, I reckon Tungsten could be a global leader in the next ten years.
Simpler, better
But in recent years an alternative proposition has emerged – invoice funding. This is a much simpler product. In this case, the small supplier with the blue-chip customer simply offers up its invoice to an online marketplace, and investors bid to fund that invoice.
The supplier might get 80p on the £1 face value immediately, and then the rest of the money once the invoice has been paid in full by the original invoicee (in this case, the blue-chip customer). The invoice funder takes a fee for this service, which can vary between 0.75% to 1.5% per month.
So in effect, an investor gets to lend money for a short period that ranges from 30 to 120 days (around 40 to 90 days seems fairly standard) and receives a return, which, on an annualised basis, could be as much as 15% a year. Crucially, because the end customer is usually (though not always) very reliable, the chance of non-payment is low.
This marketplace approach – transacted online like an invoice-based version of well-known consumer P2P lenders Zopa or Funding Circle – was pioneered by Market Invoice and its smaller rival Platform Black here in the UK, as well as by the Receivables Exchange in the US. There’s lots to like about the model.
Short lending periods (Assetz quotes an average of 42 days), decent returns of about 1% a month, relatively low levels of risk – and you can always switch back into cash if you think there’s a recession around the corner (with the potential for spiralling defaults).
The only snag is that it has largely been the preserve of institutional investors and high-net-worth individuals. The challenge is one of expertise and hard cash. Small companies want their invoices funded yesterday – they don’t want to have to wait around for a platform to pull together hundreds of different investors.
Investors in turn also need to understand each invoice: its supplier risk profile, the creditworthiness of the end customer, and the nature of the good or service supplied.
There are other challenges, not least what I call ‘repetitive finger syndrome’. To run this strategy properly you need to reinvest your cash every few months, otherwise you’ll never make those double-digit gains per annum. That means you need to keep re-investing, monitoring those deals and pressing the button that says “invest” – repeatedly!
Arguably a fund-based approach would be much better. That’s exactly what’s happened in France, where an outfit called Finexkap is offering to do all the hard work for investors looking to keep their money on the move.
One would hope that these fund managers would also keep a sharp eye on defaults – sometimes end customers do refuse to pay up and someone has to monitor the risks.
My big prediction
My big prediction is that we’ll see new platforms emerge this year in the UK, which will offer retail investors access to a better way of funding the trading position of our much-needed small businesses. Assetz is the first to come to market.
The clever platforms will also develop fund-based solutions that help investors navigate their way around the perils and pitfalls of individually assessing each deal – in effect what Zopa has done for consumer loans.
Now, I’d prefer that the end customers – the blue chips – actually paid their bills in 30 days (which would do away with the need for invoice funders). But in the meantime, why not get paid at least 10% a year to help fund what is in effect working capital?
Back the financial disruptors
An alternative to using a P2P platform is to go down the equity route and invest in Tungsten Corporation, for example. I’m a fairly big fan of this technology solutions provider-come-banker, even though its shares have been a bit of a letdown in the last 12 months.
Operationally it’s gearing up fast, with 68 big corporate customers (including GlaxoSmithKline, Tesco and BP), plus 171,000 suppliers in 47 different countries.
Tungsten says its addressable market is £117bn, but it’s still loss-making at the moment – first-half revenues were only £10m, while losses before interest, tax, depreciation and amortisation (Ebitda losses) were £13.3m.
So I accept that it’s a big ask to think that it’s worth £230m. But if Tungsten were in America it could conceivably be worth billions.
For example, alternative finance platform LendingClub (NYSE: LC) is worth $8bn, even though its shares have dropped back a bit to $22 since I wrote about them last month.
Meanwhile, new US alternative finance platform On Deck Capital (NYSE: ONDK), which focuses on lending to small businesses, is also still worth $1.2bn, even though its shares have fallen back by a little under a half since listing back in 2014.
In fact, nearly all of the financial-disruption-based businesses quoted in the US and the UK had it tough in the final quarter of 2014. AltFi Data and Liberum together run an equity index that tracks leading financial disruptors (including the likes of Tungsten and LendingClub) – it’s down by 5% over the last quarter of 2014.
But it’s also worth noting – as the chart shows – that the 28 stocks from around the developed world in this index would have produced an annualised return of more than 30% over the last three years (find out more at here).
So what’s the hottest stock in the index at the moment? I’d keep a beady eye on a Finnish company, quoted on the Helsinki exchange, called Basware (Finland: BAS1V), which is involved in invoice funding and the provision of e-invoice payment systems, coincidentally enough. Its shares are already up more than 50% over the last year.
• You can read more about alternative finance at my website, www.altfi.com.