If a doctor only treated the symptoms of your illness, rather than the root cause, you could be looking at a hefty medical bill at the end of the year, not to mention repeated trips to the surgery. Such an analogy could well be applied to the rise of invoice finance as a remedy for cash flow issues in small businesses. Instead, could addressing the root cause of the need to access invoice finance, the delay in payment of invoices, in fact be a better (and cheaper) way to improve the overall cash flow health of a business?
Looking at the numbers, there certainly is some debtor heartache for small business. According to the Asset Based Finance Association in the UK, SMEs were owed £67.4 billion as of September 2015, up 36 percent from 2011. The body’s data also indicated SMEs are waiting 72 days for payment of invoices, up from 61 days during the GFC. The story is much the same in the states. Atriadus reports that 46.4 percent of domestic B2B invoices remain unpaid past their due date, creating a myriad of financing and administrative costs associated with carrying B2B trade debt.
Cloud accounting users get paid faster
In 2014, online accounting software provider Xero crunched the numbers globally, aggregating some 16 million invoices across their cloud platform to see if they could work out the average days it took for a business using their software to get paid. They wondered, had there been any improvement since the introduction of a cloud platform?
The good news was that the answer was yes. Xero’s global customers had reduced their average debtor days by 31 percent, down from 48 days in 2011 to 33 days in 2014. But at 33 days outstanding, there was clearly still some more work to be done.
Well since then, there has been an explosion of fintech startups looking to tackle this problem, connecting into platforms like Xero and Quickbooks to fully automate the collections process and even provide instant credit reports on a small businesses’ debtors, all helping a fledgling entrepreneur understand who they should and shouldn’t be extending terms to.
Crunching the numbers
Sounds great, but compared to getting funding quickly via invoice finance how does investing in a collections add-on stack up? Well, it would seem rather admirably.
Well known invoice finance player MarketInvoice quotes a 1 to 3 percent fee on the face value of the invoice. So anywhere between $1000 to $3000 for a $100,000 invoice. An automated collections service in comparison ranges from completely free to ~$30 per month for the average business. That is a significant cost difference, and one a small business owner can’t afford to ignore. A read through of the comments in the Xero community forum for their debtor tracking software partners shows a gentle nudge can be powerful in getting people to cough up the cash.
Players to watch
Below are a few interesting/notable mentions for the SME collections sector, plus a list of others to watch and follow in the space.
Satago – UK
UK founded fintech startup that launched at Disrupt Europe 2013 in Berlin. Satago offer their base collections platform free to cloud accounting software users. For desktop applications where no doubt more complex integration software and support is needed, the company charges a monthly subscription fee. Satago are looking to monetise its cloud users via its invoice finance platform.
Dragonbill – AUS
Taking invoice payment collection to the other extreme, why wait to be paid when you could be pre-paid? Dragonbill, which initially started out as a membership fees collection platform for clubs and groups is beta testing a platform that removes the uncertainty a tradesperson or freelancer might have when it comes to getting paid, asking the customer to first deposit the funds before the work is started, with the platform releasing them when both parties are satisfied the job has been done.
Chaser – UK, expanding to Australia
Xero’s 2016 add-on partner of the year and the accounting platform’s highest rated invoice chasing add-on, Chaser, claim the average user on their platform gets paid 26 days faster. It’s not clear if this augments the Xero data mentioned earlier or is inclusive of – it certainly would be interesting to compare the company’s actual average to the Xero benchmark using the inbuilt Xero reminders.
The company claims their secret sauce is in their ‘automated humanity’ approach, making their email reminders sounds like they are from actual people, rather than bots. They also tie in with a bunch of other Xero features, like bank reconciliation, ensuring you’re not unnecessarily chasing people who have in fact paid, just not yet reconciled in Xero.
Debtor Daddy – NZ
Founded post-earthquake in my own home city of Christchurch, Debtor Daddy came into being thanks in part to an investment by business accelerator Lightning Lab. Available globally, the invoice chasing tool comes in at as little as AU$8 a month for a sole trader. Heather Smith, a reputed Xero commentator and figurehead in the community has an in-depth review here.
Others to keep an eye on:
Anything that automates administrative tasks around financial management is a huge win. A number of these platforms remind me of how marketing automation is transforming customer communication, allowing sales teams to prioritise warm verses cold contacts for further follow up via lead scoring models.
If these small business focused debtor management tools enable a business to develop their own scoring mechanisms around good verses bad debtors, this could allow an individual business to then layer in their own credit assessment on top of official bureau data. While this would allow businesses to be more selective about who they offer their services to, on the flipside, having a reputation as a quick payer would be something a debtor could also leverage when looking for new service provider contracts, helping them secure better terms.
Of course, not all debtors are going to come to the on-time payment party. Some of the larger ones may rather like the fact they get a comfortable 30, 60 or even 90 to 120 days interest free credit on their purchases. But for small business to small business, creating a way to collect funds faster seems a no brainer, and most probably cheaper than borrowing money to fund business growth.