What's more complicated than a B2B transaction? A B2B transaction in an industry like construction, where what triggers a payment isn’t a single, simple invoice. In this sector, B2B payments are a complex process that includes layers of internal approvals to document sharing, in order for money to flow from lender to developer to general contractor to the trades who do the work.
It is perhaps unsurprising, then, that the construction sector is no stranger to delayed and late B2B payments.
According to construction loan automation software company Rabbet, the vast majority of subcontractors get paid far beyond their net 30 terms. In fact, nearly half wait up to 90 days to receive funds.
Indeed, PwC research says that with an average of 54 days sales outstanding, the U.S. construction and engineering industry has the longest B2B payment times of any other market, making it an attractive target for B2B FinTechs.
Rabbet is one of them, aiming to accelerate the movement of funds down the construction supply chain by working with banks and lenders that provide financing to developers, which rely on loan payouts to pay their contractors, who then pay their own subcontractors, and so on. CEO Will Mitchell told PYMNTS' Karen Webster that construction firms suffer some of the hallmarks of lengthy B2B payments, including the continued use of paper checks. Yet the check isn't the true culprit behind payment delays.
"The difference between checks and ACH is about a week in payment time, but the industry is suffering from 54 DSO [Days Sales Outstanding]," said Mitchell. "Even if you get everyone on ACH, it's only solving seven of those 54 days."
Rather, the true solution lies in data. As Mitchell explained, companies in this industry rely on more than a simple purchase order and invoice to initiate a payment. Lenders require a stack of documents and information to verify that a project is moving along as it should, and cannot disburse funds until that information is received.
All of it.
Unfortunately, developers that need to send that information too often rely on email chains, PDFs and Excel spreadsheets to generate a document package each month to obtain funds. The process forces a developer to manually access information across multiple back-office systems, which Mitchell said creates massive inefficiencies and room for error. Worst of all, the process slows down the rate at which funds can be disbursed, creating a bottleneck of funding down the chain of contractors and subcontractors.
"If lenders aren't adopting technology or being involved in this discussion, [solution providers] are missing out on the bulk of where construction payments come from each year," he explained. "The combination of heavily regulated banking entities and heavily regulated construction activity overlay into super-complicated requirements for documentation and information."
With this in mind, Rabbet begins with the lender itself, addressing a financier's data and documentation collections needs to help developers create the package in an accurate and timely fashion. This strategy helped the company secure $8 million in Series A funding from Goldman Sachs' Principal Strategic Investment group and others, the firm revealed last month, which will be used to continue building out the Rabbet solution.
As the firm expands, Mitchell noted the company also sees opportunity in targeting the developers themselves with its data aggregation automation technology to provide support for faster access to loan payouts.
There are other areas that Rabbet is exploring, too, stemming from its access to troves of valuable data. Predictive analytics technology can offer the platform a way to benchmark the performance of users against industry peers and similar construction projects, for instance. Mitchell said there is also opportunity for data sharing to promote payments predictability and confidence for businesses, so that even if they won't be paid on net 30, a contractor may at least be able to forecast when a payment will arrive and plan accordingly.
But today, the biggest nut to crack is the speed with which companies receive and make payments in this field. While an ideal B2B payments world may see a company pay suppliers the day an invoice is received, pushing payments down to net 30 is "a bold enough vision" for the construction space, according to Mitchell. Achieving faster payments is essential not only for firms' cash flow, he said, but also for fostering stronger business-to-business relationships - which is increasingly the industry's top priority.
"There are a lot of people who care a lot about the customer experience, and how a customer is getting money," he said. "There are a lot of complex relationships across the ecosystem that you have to understand. At the end of the day, what you find is that everyone aligns around faster payments. If you can bring the industry together around this common objective, it will benefit all of them."