The Cloud Factor(ing)

Factoring – or the financing based on receivable debt – is a fairly ancient idea that has existed as a method of financing commerce for almost as long as buyers, suppliers, and a lag between receiving goods and paying for goods has been around.  

“Factoring has been around since Babylon,” Eyal Lifshitz, CEO of BlueVine, told MPD CEO Karen Webster in a recent interview about how his firm is looking to disrupt that 4,000-year institution of factoring.

And it is an institution, Lifshitz notes, that is fairly ripe for being disrupted since there has been so very little innovation in how it is offered in the last four millennia or so.

“When we were first investigating this space, the first thing that jumped out was ‘Whoa, no one has done anything here, ever.’ This is a really old industry to start with, but even in its modern version it hasn’t really been innovated on.”

Which, in what has rapidly become the era of financial services innovation, should actually seem somewhat strange, as factoring is a well-known, well-established and time-tested method of financing, particularly for smaller suppliers. With so many financial services technologists leveraging the cloud computing and better data analytics against problems in underwriting, risk management or credit evaluation, why wouldn’t factoring be a more attractive invite to the FinServ innovation/disruption party?

“Because it’s hard,” Lifshitz noted jocularly as he gave the simpler answer to that question when Webster posed it.  

But, Webster noted, so are all of those other functions — and yet innovators have braved the challenges.

Lifshitz agreed that these things were all highly challenging and complicated to give a digital update to, but that factoring as a form of business financing is both unusual and especially complex.  

“Factoring is a more complicated model. Doing an amortized loan is way simpler than having to do a revolving credit facility and financing invoices and having to subsidize two sides of an equation and then manage all those payments,” he explained.  

“When you extend credit you have one party to deal with, but with factoring we have two parties in our clients: [the suppliers] and their clients [the buyers]. We have to know how to do wires, ACH, checks and then we also need to do payments well enough to be receiving them from hundreds of thousands of debtors. That requires fast and automatic invoice matching.”

But, noting that he was not one to “shy away from a challenge” — and that despite the challenges, the factoring space could clearly benefit from the cloud-based and data-enhanced path of the digitized financial services future — BlueVine decided to take a page from the alternative financial services playbook and apply it to the factoring game.   

“We are using data-driven underwriting and our service is entirely online. I don’t think the industry is bad; it is just very archaic, manual and back office.”

And that old-school nature, Lifshitz notes, means that interacting with factoring as a system is complicated for everyone involved.  

For buyers who need financing, the system is entirely opaque and low on options.  

“If you want to work with a factoring company today, a good majority of them require a six month [contract] at minimum and more likely a year. Apart from the annual contract, agreements also call for minimum monthly volume, and don’t allow suppliers to  fund just one receivable. You have to fund all of them or at least all of them for one customer. Plus, there are a lot of hidden fees and penalties.”

And those penalties are no joke, Lifshitz told Webster, as they can run firms into the hundreds of thousands of dollars.

And so BlueVine’s value prop in the area is simple: no contracts, no backend fee structure.

“This is very standardized, very clear terms, more of what they are used to when they are consuming online services today,” Lifshitz explains.

But, Lifshitz notes, it is important to note that the current players in factoring aren’t creating these long-term contract plans or fee structures because they have a deep and abiding love of keeping their customers hostage, but because factoring is labor intensive and time intensive, meaning those structures keep those firms profitable.

BlueVine is able to avoid them and focus on their vision of simplicity and transparency because it is supported by the firm’s second main differentiator in the market: a commitment to a digitized, cloud-based experience.

“With us, we are 100 percent online — there is no paperwork, you open an account in three minutes, it is all streamlined and fast.”

And the time it takes to get funds into an account is also fairly fast — within a few hours on the first loan, and within a few minutes thereafter as BlueVine becomes more knowledgeable about their supplier partner.

The speed, he notes, does not come at the expense of precision with the risk evaluation; in fact, in some ways, BlueVine does a more complete job of evaluating their potential factoring partners, Lifshitz said, insofar as they not only look at the supplier, but also the buyer who owes on the invoice.  

“We use standard ways by pulling debtor’s business credit, but we also use other things that are more sophisticated.”

And sometimes, he notes, there have even been instances when BlueVine has spotted a problem with an invoice because of the debtor credit issue and managed to provide their supplier partner with useful data they didn’t have yet. 

“We will tell the customer we aren’t buying it, because your customer just declared bankruptcy and they’re not going to pay it.”

The speed is not traded for great cost either, as BlueVine offers tiered pricing based on a firm’s length of relationship with them, past credit history and the strength of the debtor credit. That offers a price range that usually means (particularly for returning customers) the rate BlueVine is charging is quite a bit lower than what they would see in a more standard loan — think a 20 percent APR vs a 50 percent APR.

And if they can really offer the marketplace an option for factoring that is faster, cheaper and less restrictive, Lifshitz thinks it is likely they can make it a more popular form of financing.  

“It doesn’t let you take on more than you can chew, it doesn’t allow you to get over leveraged.”

A prospect that has just gotten easier, no doubt, as BlueVine has snapped up $40 million in Series C funding, led by an investment from Menlo Ventures, with additional participation from new investor Rakuten FinTech Fund. The round also saw follow-on investments from Lightspeed Venture Partners, 83NORTH, Correlation Ventures and private investors, as well as a new debt facility from Silicon Valley Bank. Additionally, Tyler Sosin of Menlo will join BlueVine’s board.  

“BlueVine is bringing automation and a modern Web experience to factoring, a massive market that has yet to be optimized by technology,” Sosin noted. “We’re excited to partner with BlueVine to make working capital more accessible to the more than 20 million small businesses across the country.”

Lifshitz says the new round of funding will be pushed primarily toward growing the firm and in all directions for R&D, to Marketing to Sales. All in, the firm hopes to grow to 90 people by the end of 2016 from the 60 or so on board today.

“We’re just really, really ambitious in where we want to go both in product and technology, so I can’t say there is just one thing — we are pushing on all fronts.”

Investments For Week Ending 01-15-2016

Even more accelerated activity marked the second week in the period that ended Jan. 15 and headed into the long weekend. Could we be waking up to a January where stock markets plunge, but tinder is lit under the venture capital and private equity sectors?

Maybe not, judging from the relatively outsized weight that was attached to one deal in the financial sector. We’ll get to that in a minute, but first, the general results: For the week, total investment activity came in at just over $1.1 billion, with just about all of that in FinTech.

The key deal that held the most sway over the week was the sale by UniCredit of its Ukrainian operations to ABH Holdings, and under the terms of the deal the bank will get a 9.9 percent stake in ABH. The net result of the sale will be that UniCredit will book a charge of about a few hundred million euros, and has said in addition that it plans no additional asset sales in the wake of this deal. Far lower on the totem pole we see the $70 million raised by Starling in an effort to get its movement into the United Kingdom’s banking system some extra oomph. As has been reported, the firm is looking to challenge incumbent large players entrenched in the country’s “High Street” pantheon, chiefly through the use of technology and digital services in particular. And, in a headline tied to the cybersecurity market, Shape Security grabbed $25 million in a Series D round, with Baseline Ventures leading the round and joined by a number of other investors, including Northern Light Venture Capital and bringing the total raised by company since 2011 to $91 million. The company’s technology guards, via what is known as “Botwalls,” clients against automated hacking attacks. Below are the Top 5 deals for the week, as ranked by deal size.

Given the UniCredit status as the week’s heavy hitter, it’s no surprise that Europe held the dominant position in the timeframe, with roughly 90 percent of the dollar tally through Friday. Given the worries coming out of China, the sharp slowdown there, and general skittishness of both retail and professional investors, might we see more activity in the U.S. and Europe through the bumpy rides? As they say, watch this space.


Latest Insights: 

Our data and analytics team has developed a number of creative methodologies and frameworks that measure and benchmark the innovation that’s reshaping the payments and commerce ecosystem. The July 2019 edition of the FI Innovation Readiness Playbook examines how the innovation playing field is leveling as small FIs implement bolder strategies and larger banks adopt more measured approaches.


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