Leveling The Lopsided Trade Finance Playing Field

The world of B2B payments can be a somewhat lopsided place to navigate — a reality incredibly apparent in looking at the difference in payments terms that larger, more established companies with thicker profit margins get when compared to their smaller, newer and thinner-margined counterparts.

The advantages for big firms, Abbie McBride, vice president of sales and operations at Fundbox told PYMNTS, come from the fact that large high-margin firms have all the baked-in advantages of better cash flow and its ability to act as a buffer. For large suppliers, she said, that means they can issue trade credit and other incentives to their buyers, which makes them more competitive and advantageous. By the numbers, McBride noted, a little over 21 percent of large suppliers offer payment terms of 60 days to 90 days, while just 6 percent of earlier stage, lower-margin businesses do the same. The reason, she said, is simple: often they just can’t afford it.

Large buyers, on the other hand, can pay late — very late in some cases — because they have all the leverage in the relationship. The small supplier often doesn’t have much of a choice when it comes to accepting whatever terms are offered, because they can’t afford to lose their biggest buyers’ business.

“I actually heard a story from someone who currently works with a very large firm that forces all its suppliers to give them 120-day terms simply because they knew that their suppliers couldn’t stand to lose their business,” she said.

The work Fundbox does, McBride said, is to try to use technology to level the playing field between high-margin, established players and the lower-margin, up-and-coming firms that need trade credit, but often aren’t eligible for it.

Performance-Based Trade Credit

When one looks at how trade credit is traditionally offered via banks or larger suppliers, the process tends to be particularly unfriendly to newer firms. The focus is often on the number of years a firm has been in business (10 tends to be the favored number), along with revenue and the list of references a business can put together.

“And these tend to be very firm, mostly immovable parameters that just box out smaller and earlier stage companies,” McBride said.

Moreover, she noted, it is a model that boxes out businesses unnecessarily, because while time in business and revenue are certainly both ways to look at a small business and understand how healthy it is, they aren’t the only ways.

What Fundbox offers as an alternative, she said, is an automated trade financing platform that makes it easier for small suppliers to provide terms to their buyers, or for small buyers to gain access to longer payment terms without having to clear the normally rigid hurdle set. To make that underwriting decision, she said, they look at more than 100 data points to evaluate the overall health of the businesses, with a focus on its growth trajectory.

“We have been around for over six years and during that time we have worked nearly exclusively in underwriting small- and medium-sized businesses and extending credit in one form or other. We have learned a lot about what sort of factors and data tracks with a creditworthy firm that is likely to pay us back.”

Bringing New Firms On Board

The wider world of trade credit, McBride noted, is an ecosystem so large that it is easy to lose track of just how much money is tied up in it. At any given moment, she said, about $3.1 trillion is tied up in outstanding invoices. McBride referred to this suspended ocean of capital as the “Net Terms Economy.” Granted, the bulk of that is in enterprise contracts, but even separating out the small- and medium-sized business (SMB) invoices there is still over $1 trillion locked up.

“That is a lot of money tied up in the Net Terms Economy, showing just how pervasive this practice is,” she said.

But it is a practice, she noted, that SMBs are increasingly getting up to speed on, though the rate at which they are doing it varies.

Those working in industries where financing payment terms are common, she noted, need the least convincing that working with Fundbox on trade financing will be a boon to their business — because on both the buyer and supplier side getting or offering trade financing terms is an existing major pain point. What Fundbox tends to hear from suppliers are tales of “drowning in accounts receivables” without the time, staffing power or funds to go chasing down payments. From buyers, the stories are of the series of hoops they have to jump through — usually to “receive the narrowest and often least advantageous terms.”

For suppliers and buyers in industries where terms are less common, she said, the appeal is present but different. What they tend to see is a chance for competitive advantage and getting ahead of the market.

In either case, what Fundbox wants, in general, is to make B2B payments and credit a bit less archaic, a lot more streamlined and much more inviting to new and developing players, she said.

“We believe that our approach to machine-learning risk assessment, coupled with on-demand access to business credit with more flexible terms, will enable businesses — on either side of a transaction — [to] be able to buy more or sell more and grow.” McBride said, “If B2B businesses are empowered to pay or get paid faster, [it] will prove to be transformative for any industry where late payments or limited access to credit have slowed growth opportunities.”