For many small businesses, liquidity is crucial and sometimes elusive. One way for business owners to bridge the gap between cash that goes out the door to run a business and (sometimes delayed) cash that comes in is to factor receivables and have a lender provide working capital.
PYMNTS caught up with Max Eliscu, the founder and chief executive officer of accounts receivable financing firm LSQ, to discuss the current landscape in receivables financing, and what the future holds.
The alternative lending industry has seen a lot of diversification, and receivables financing has been gaining traction in the past few years. What do you think is contributing to the growth of that sector?
ME: I think there’s one primary reason: The merchant cash advance and daily direct debit industries have really few sustainable competitive advantages.
Entrants in those markets are now competing on price and the lowest cost source of distribution. Essentially, the industries are already mature. Technology is accelerating the life cycle. As a result, the smartest of the new entrants are seeking either an easier path to differentiation and sustainability or targeting industries not so heavily trafficked. Receivables financing is one of them.
You recently secured $40 million in funding. Can you tell us how you were able to attract that capital, and, of course, the big question — how are you planning to invest it?
ME: LSQ has been in business for 20 years. We’ve advanced more than $12 billion to small businesses, and we’ve always differentiated on technology to enable us to deliver on scale and service excellence.
We have an enormous amount of data that we’re able to leverage to help us create tools to simplify and automate the underwriting, approval and funding experience.
The capital that we raised from Ares and the more than $100 million in capital that we raised a few months ago from Lovell Minnick is being deployed to accelerate our delivery of a seamless, efficient, entirely electronic underwriting approval and funding process for all of our customers.
More specifically, we are really targeting the needs of small and micro-sized businesses that continue to really struggle with access to capital.
That kind of funding led to LSQ having an 85 percent growth rate last year. What strategies are you using to grow your business?
ME: Our growth is really driven by two primary factors: distribution relationships with financial institutions who, contrary to popular convention, really want to help their small business and business banking size customers grow, and exceptional client experience. We leverage technology to help us deliver both.
As a result, our retention and renewal rate with our clients is exceptional. We aren’t on the treadmill that so many companies are on — constantly having to replace their portfolios.
Our growth has not been driven by direct marketing or digital remarketing. It’s been driven by finding the intersection between businesses in need of liquidity and financial institutions and other third parties who are desirous of delivering it, but are yet unable to.
A lot of suppliers struggle to get paid. What kind of tangible benefit can you provide to those suppliers by accelerating their payment?
ME: Let’s say a plumber has a contract with a building owner, and there is a water main break. The plumber’s job is to fix that problem, and that may require the plumber to buy pipes and tools, and bring in some of his friends and hire some additional employees to service the emergency. Absorbing the cost of buying all those things and paying all those people is on the plumber.
If the contract with the building owner requires the plumber to bill on net 30 day terms then the plumber won’t be paid for at least that amount of time, but it often takes longer.
If the plumber consumed all of his available liquidity to buy the equipment, pay his people and service his client, and another building had a similar issue the next day, the plumber wouldn’t have the ability to service the opportunity, as all of his cash would be tied up in receivables. Selling and generating receivables is a wonderful thing for businesses, cash is necessary to grow, and for that the options have always been limited to banks, family members and credit cards.
It’s the same reason that restaurants and retailers accept cards. At the end of the day, a card transaction is really a merchant processor… delivering liquidity at the time of a retail sale.
We do the same thing for B2B transactions, so that no small business will ever be constrained by a strong receivables portfolio and a weak cash position.. The only requirement is that they must sell to businesses that can pay their bills.
Determining that they can pay their bills is something that we’re very good at. In fact, it is one of the services that we bring to suppliers. There are new entrants in the marketplace who finance receivables, but they don’t do any credit work. In LSQ’s case, we are able to deliver as a component of our service, an entire credit department, so that in real-time businesses can know: how much more they can safely sell, and if they are at risk of not getting paid.
For us, it’s not just about meeting the needs of small businesses from a working capital perspective. It’s also about helping them avoid catastrophic loss when their customers can’t pay. It’s really about business process outsourcing and simple access to unlimited amount of liquidity.