Much of the alternative business financing market formed as a response to the need for an entirely different way for companies to take out a loan. Steve Troy, CEO of AeroFund Financial, says that’s a trend permeating many components of corporate finance today: Businesses don’t just need better tools – they need, in some cases, an entirely new way to manage finances.
That could mean new payments rails, automated accounts payable solutions, or sophisticated tech like AI. The desire to look at corporate finance solutions in a different way is, in part, what led AeroFund to create its AeroPay Express unit, which, according to Troy, attempts to approach reverse factoring from a different angle.
A couple of years ago at a conference, the executive said, some software developers had approached AeroFund with a reverse factoring solution; Troy told PYMNTS that he wasn’t convinced the tool could work.
“Being in the industry for 20 years, I thought it just won’t work,” he said. “There are too many pitfalls. But they were insistent, and we realized that maybe we don’t have to do this as reverse factoring.”
With the creation of AeroPay Express, the company is marketing its solution as a virtual credit card – but in reality, the solution uses ACH payment rails. Troy noted that the company approaches corporate buyers with a virtual credit card model because it’s easier to understand.
“We call it a virtual credit card, but really it’s a virtual credit line,” he explained. “We use a credit card in our marketing because it’s a way for someone to understand how the process works. They already know how the credit card works.
“It’s an unsecured credit line that a business can use to pay their bills – I call it a credit card on steroids,” the CEO continued, adding that unlike consumer cards, corporate transactions can range into the millions of dollars. Further, businesses don’t have to manage a credit card number or the risks of fraud that come with card products.
“Credit card numbers are not very secure. They can be stolen and misused,” Troy said. “Credit card numbers are important for consumer-to-business, because you need to be able to identify people. But in the B2B marketplace, we know who the buyer and seller are, so we facilitate the transaction between the two of them.”
The aim of this kind of financing solution is largely to ensure that money lands in suppliers’ accounts more quickly. In the U.S., a slowing down of accounts receivable cash flow is straining many businesses’ bottom lines, the CEO said.
“Historically, we’ve seen the average payment of an invoice be paid in about 42 days,” said Troy. “If you go back 20 years, a lot of sales would have 50 percent or 60 percent profit, but so much has been squeezed out of the marketplace, so people are seeing maybe 10 percent, 12 percent margins, which means they have to put up more of their actual capital and wait for profit to come back in 30, 40 days. They’re waiting for capital they use to buy inventory, and it comes later and later – that really stresses a business to be able to expand.”
Banks, too, are finding it more difficult to finance these businesses struggling with thinner margins, he said. “It’s gotten more problematic for some businesses, and a strain on their cash flow.”
The credit card model, which sees a middleman pay a supplier at the time of the transaction while the buyer can take time to pay its bills, is an easily understood concept for buyers, and offers a new angle from which to approach the concept of reverse factoring. Similarly, various payment rails are each looking to approach their services in new ways to stay competitive, said Troy, which is why he also sees potential for same-day ACH to positively impact the B2B payments space in the corporate financing industry – not because businesses want to pay their suppliers same-day, but because financing firms can ensure funds land at a supplier same-day, while buyers retain the float time.
“[Same-day ACH] is going to be tremendously useful,” Troy said. “We’re seeing more use of 24-hour ACH – I don’t think anyone is really clamoring for same-day, but it will sure speed things up. There is a lot of competition among different types of payments. Everyone wants to stay relevant.”
Acceleration of ACH transfers is one way the payment rail is staying competitive. B2B payments aren’t necessarily top-of-mind when it comes to faster payments adoption; those squeezed margins mean businesses get to wait longer to pay invoices. According to Troy, one of AeroFund’s clients was recently told their invoices would no longer be paid in 30 days, but in 120 days.
“Think of the stress on that company,” he said.
The various payment rails’ ability to offer faster payments, coupled with the alternative finance sector’s ability to offer an alternative to sluggish bank loans, are all contributing to an overhaul of corporate payments in general. Troy noted that this is indicative of the B2B FinTech space coming in to disrupt the status quo.
Technology provided advancements in some ways, he explained – for instance, with the creation of electronic calculators and spreadsheets.
“They created computers and spreadsheets to make crunching the numbers easier,” Troy said. “But millennials are coming out and saying, ‘all of this has made the job easier, but why don’t we just change what the job is?'”
In other words, some technologies have made data entry an easier task – but technology today is able to negate the need for data entry altogether.
“I think artificial intelligence is going to come in to make a lot of decisions digitally, because nobody wants to do the brunt work, even if that work is simpler – it’s still a lot of data entry,” he said. “Younger people are coming into business and demanding that these processes become automated and friendlier to use. They don’t want to be someone behind the curtain pushing buttons; they want more flexibility. Each individual area of finance has not just been made easier, but you’re seeing a transformation in finance where, if it doesn’t make sense, it can be replaced with something else.”