Small businesses (SMBs) frequently cite cash flow crunches and the struggle to access capital as key hurdles to the success of their business. These problems faced by SMBs are also shedding light on supplier payment practices and large corporates’ strategies of lengthening payment terms to their suppliers in an effort to address their own cash flow crunches.
There is no shortage of FinTech firms that have emerged since the 2008 financial crisis aiming to facilitate access to small business capital, many of which target supplier and invoice financing specifically. As the industry grows, access to small business financial data is a critical component of risk mitigation and underwriting practices. Yet, the market’s focus on the small business borrower alone may not be sufficient in addressing its cash flow management needs, says Diego Caicedo, CEO and co-founder of Colombia- and Chile-based Portal Finance.
The company recently announced a $200 million commitment from BTG Pactual, Latin America’s larges financial institution (FI). The investment signaled Portal Finance’s dive into bank partnerships, adding onto the company’s existing strategy of collaborating with factoring companies and large corporate buyers.
According to Caicedo, the decision to work with multiple partners reflects the importance of addressing small business cash flow gaps by not only examining an SMB’s financials, but looking at that business in the context of its supply chains, corporate customers and financial service providers for a more holistic view of its financial position. After all, with lengthier payment terms (a key factor behind cash flow issues for SMBs), targeting the payers themselves is a logical step to reaching the small business.
“We found that by helping large corporates de-risk their supply chains with their accounts payable and reconciliation processes, we were able to leverage the relationship with their supplier network to reach a large number of suppliers,” Caicedo told PYMNTS.
Not only does this provide a low cost of acquisition for Portal Finance (working with a single corporate buyer could link the company to as many as 3,000 suppliers, he said), but tackles small business finance at a point of friction directly.
Working with a bank like BTG is another spoke in the wheel of small business financing, but one that similarly addresses risk mitigation in the market. Caicedo said the company’s work with BTG is in an effort “to provide big corporate suppliers with capital costs that are similar to if they were big corporations.”
In other words: more affordable financing. It’s not possible without access to key financial data and adequate risk mitigation strategy, however, because offering financing at market rates requires the assumption of default market rates. Ensuring small businesses won’t default on their financing means not only understanding their current financial positions, but understanding how their corporate customers pay their vendors and the data related to how that borrower operates in the market at large.
“It’s how they interact with the rest of the market, with their employees, with other FIs,” Caicedo explained. “We can better understand their business at the core, than if we were only looking at a little part of their financial statement.”
He continued, “Everyone says data is the new gold, the new oil. But what it really comes down to is putting that data together, making sense of the data to be able to take it to financial institutions and say, ‘Since we have the data, you can lower your risk profile.’ We look at the business through the lens of [its] capacity to generate value.”
Adequate data analysis is key to bridging small businesses with affordable finance, and SMBs’ corporate customers are a significant source of that data. However, as Caicedo explained, this process isn’t just about mitigating risk for small business lenders; it’s about mitigating risk in the corporate customers’ own operations.”
While longer payment terms may be a necessity in a post-Basel III world, ensuring the financial stability of one’s key suppliers is essential, too, he said. He offered the example of one current customer, a large Chilean mining company, which relies on suppliers and subcontractors for its key operations.
“If that supplier is not paying its taxes on time, not paying its Social Security payments on time, not renovating [its] equipment fleet as [it needs] to be, [it’s most likely] going to go out of business,” he said, adding that such a scenario would ultimately blow back on the miner itself.
Of course, the end focus remains the supplier’s financial health. Though small business financing has seen an explosion in loan products, Caicedo said, invoice financing is one of the most critical, because while a Chilean miner may endure significant harm if a supplier collapses, that damage is nothing to what the supplier itself faces.
“This is actually about survival for most of these companies, if they don’t have the cash to operate,” he said. “This is not expansion money they’re using. This is operational money.”