Working Capital Finance is the hard to see elephant

In the story of the blind men and the elephant:

 “Each one feels a different part, but only one part, such as the side or the tusk. They then compare notes and learn that they are in complete disagreement.”

The working capital finance market is like that. We can all agree that it is huge, but depending on which part of the elephant we are touching we see a very different animal.

Banks and large corporates see Supply Chain Finance. SCF is something that Banks offer their Corporate clients. The same animal seen from the vendor side is called Approved Payables Finance (APF). If your invoice goes to a company that has a Bond Market Credit Rating (from S&P, Moody etc), lenders will offer a low APR to give you the cash upfront. The risk that a AAA Corporate will default on an approved invoice is low, so the APR is low.

Banks have been bad at on-boarding the small vendors (this is a technology driven service business and Banks are not good at serving small business). This window has enabled many mature, tested platforms for SCF/APF to emerge. They vary mostly by where the financing comes from such as:

  • Orbian – financing comes from the capital markets.
  • Taulia – financing comes from the Corporate Buyer

Another player is C2FO (formerly known as Pollenware), a venture from the American Midwest backed by Union Square Ventures among others. Their innovation is to have suppliers “name their own rate” for early payment on their invoices from buyers, based on their needs at a given time. It’s an online marketplace that allows both the buy and supply sides to optimize their working capital positions in a live, bid/ask environment.

Citibank is one bank that remains focussed on this market.  Citi Transaction Banking has long operated more like a tech company than a bank. Think of them like a Fintech venture dressed up as a bank. Citi Information Exchange uses the ISO 20022 messaging standard. Data exchange between AP, AR, Banks and Treasury is the key to working capital finance, so this will be interesting to watch.

If you are selling to small companies that do not have a Bond Market Credit Rating, you will see a beast called Factoring. This is what small businesses have traditionally used to get paid upfront. The APR cost is high and it can be cumbersome. A variant of this is called Invoice Discounting. This is Factoring with a subtle but important difference. The Seller collects the money and pays a fee to the finance firm (in contrast, a Factor collects the money from your customer and remits the balance to you minus their fee).

Factoring/Invoice Discounting is still a fragmented service business with lots of niche suppliers. Nobody has figured how to automate/scale this. The huge need for B2B working capital finance has led to some innovation by trading these invoices through marketplaces such as:

These invoice marketplaces are springing up in different countries. Having lenders compete does have some impact on reducing the APR, which can be pretty high on Factoring/Invoice Discounting. However Lenders look for risk adjusted return on capital and that risk is not fundamentally changed by re-selling the invoices through exchanges. I think these invoice marketplaces will move to the big lending platforms such as Lending Club, as network effects always rule in marketplace businesses.

If you sell to consumers, you will see an animal called Merchant Cash Advance. This is Factoring/Invoice Discounting for Retailers who get paid via a Credit Card. The APR is even higher than for Factoring/Invoice Discounting. It is like PayDay Loans, OK if used in an occasional emergency, a business killer if used regularly. This is scalable through automation so there have been a few venture-backed startups.

If you sell thorough digital marketplaces such as eBay, Amazon and Sharing Economy services you may see Iwoca which offers lower APR for these digital micro businesses.

One thing that confuses people across all these types of working capital finance is that lenders often quote a rate for say 30 days ie the time when the invoice would normally be paid. You might hear 2% quoted (for 30 days), but that translates to 24% APR. Some lenders and platforms fight against this normalization to APR, but only a desperate or financially illiterate borrower would fail to calculate APR.

If you are in the IT Business you will see Electronic Invoicing. This is an enabler for all the working capital finance methods. Some of the leaders such as Tungsten, Basware and Tradeshift have moved into the financing market. They have to do this because e-invoicing is increasingly seen as just one feature of ERP/Accounting systems. Seen from the IT perspective, e-invoicing is one part of Accounts Payable Automation. This is an IT function, increasingly driven by outsourcing services. If a company can get 100% of invoices electronically, they can take a big axe to their AP processing costs. Getting vendors to go all electronic is a mix of carrot and stick and the big companies find it easier to force this on suppliers (who may then get early payment, so it is win/win if the system is easy to use).

Of course, there are other ways to get working capital. One time-honored but tough way is to just gut it out by keeping costs low so you can always finance from profits. Or you can raise money through Term Loans. The Automated Term Loan Processing marketplaces such as Lending Club and Ondeck are thriving because of the underlying demand for working capital finance. This is the same elephant.

I see two game-changing innovations in this market:

  • Faster B2B Payments that byepass SWIFT payment rails. Think of this as e-invoicing on steroids. This is where Working Capital Finance and Corporate Treasury intersect. The ideal is Straight Through Processing (STP) from Accounts Receivable (sending invoices) to Accounts Payable (receiving invoices). The current leader in this market is Traxpay. New Blockchain based payment platforms are likely to totally change the economics and speed of B2B payments and this will change the economics and landscape of working capital finance.
  • Using statistical modeling to approve before the invoice is approved. The innovator in this game is Remitia.

PWC has a good survey that pegs the working capital finance market at 309 billion Euros. We can all agree that the animal is big – so it is probably an elephant. It has always been a big market, but big markets only become opportunities for entrepreneurs when some trigger forces change. The working capital finance market is currently a window of opportunity big enough to drive a truck through because there are two triggers:

  • Banks withdrawing even more to protect their balance sheets (due to Basel 3, stress tests etc). Banks have never been good at serving small business and they are getting worse.
  • Small companies, with their balance sheets already stretched by the long recession are starting to see more orders coming in from a gradual recovery and need financing to service those orders.


  1. Hey Bernard,

    Great piece this morning. I wanted to introduce you Carlos Vega, Founder of Tesorio. They are a startup in the working capital space that I think should be on your radar. They are a friend of Wharton FinTech and we’re very bullish on the team.

    I’ll let Carlos take it from here!

    Cheers, Daniel

  2. Hi Bernard,
    Interesting piece, thanks.
    Please take a look at Ad Van der Poel’s blog entries and . Any thoughts?
    I’d like to introduce you to Ad to share thoughts & discuss this more. Interested?

  3. Hi Bernard –

    I’ve been following your blog since Dan McAuley put me onto it and I couldn’t agree more with your view that finance and analytics need to play a more important role than just process improvements in supply chain tech.

    Your writing resonates deeply with what we’re trying to accomplish at Tesorio.

    Who do you recommend I contact to find 20 minutes on your schedule?

    Cheers, Carlos

    Carlos R. Vega CEO | Tesorio 267.269.6758

    On Wed, May 20, 2015 at 10:10 AM, Daniel McAuley wrote:

    > Hey Bernard, > > Great piece this morning. I wanted to introduce you Carlos Vega, Founder > of Tesorio. They are a startup in the working capital space that I think > should be on your radar. They are a friend of Wharton FinTech and we’re > very bullish on the team. > > I’ll let Carlos take it from here! > > Cheers, > Daniel > > > On Tue, May 19, 2015 at 10:41 PM Daily Fintech <

  4. Let’s not forget ApexPeak, a FinTech that’s created new ways for underserved businesses in emerging-markets to access cash where none existed before. We’re assembling one of the most unique, end-to-end e-procurement ecosystems in ASEAN.

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