Interview with Tom Dunn of Orbian about the past present and future of Supply Chain Finance



There are some people who do more than they tell. Tom Dunn, the Chairman of Orbian, is one of them. He has quietly built a big and profitable Fintech business that is delivering low interest finance to SMEs and better risk adjusted returns to investors. I have witnessed Tom building this business for many years, having first met him in 2013, before I started Daily Fintech. It was great to sit down with him and get his take on this interesting but often misunderstood segment of Fintech.

Fintech before it was called Fintech.

Orbian is no overnight sensation. Orbian began as a joint venture between SAP and Citibank in 1999. In short, Orbian is the offspring of Fin and Tech parents. In 2003, Orbian became an independent company through a buyout led by a group of private investors. Between 2003 and 2006, Orbian focused on being a white label provider to Citibank. In 2007, just as the financial crisis was getting started, Orbian started developing its own financing capabilities and separated itself from Citibank.

Sumitomo Bank bought a 15% stake in 2014 and offers services based on Orbian on a white label basis.

Growth as an independent business got going after the Global Financial Crisis. Orbian is another example of businesses that get their major traction in tough times.

Orbian currently operates in 60 countries (while keeping operating overheads very low because they are not having to assess credit risk) and has 73 buyer programs. Orbian targets investment grade or other corporates with high quality financials. This is not a business that aims to get financing for troubled companies.

Orbian provides supply chain finance (SCF) working capital services. They focus on the largest corporate buyers and their most important strategic vendors – what Tom calls the big intersections. They focus on a wide range from $50k pa in spend to their largest to date at around $1.1 billion pa in spend. The financing model is bank agnostic (ie anybody can be a lender).

SCF works on a simple and elegant principal. The credit is based on the Payable (not the Receivable) of the Corporate buyer (not the SME seller). Let’s say the Buyer is a AAA rated Corporate (Orbian will go as far as BBB) and an approved invoice from a Seller is being financed for 3 months. What is the risk that a AAA to BBB rated Corporate will not pay an invoice that they have approved? The risk is comparable to developed country sovereign debt, but with a much better risk-adjusted return on capital. So it works for investors, particularly in a world starved for yield for investors who don’t want to pile on the risk in the hunt for yield.

Tom pegs the SCF market today as about $50 to $70 billion pa of assets.

The results, for SMEs who have corporate customers, speak for themselves. They get an APR that is LIBOR + 1.5% for a BBB rated buyer (about 2.5% with LIBOR at 1%). Contrast that with alternatives such as Receivables Financing, or term loans through Banks or AltFi. Even better for the SME is that the lender has no recourse on the SME. That is because the investor is NOT lending to an SME. Also the seller/borrower gets 99% of the receivable amount (vs around 70-80% for factoring).

To understand how that works, one needs to dive a bit deeper into how Orbian does it. They buy the confirmed Receivable (aka Approved Payable as seen from the Buyer side) on a “true sale” basis. Orbian is not a marketplace that matches on a best efforts basis. Yet Orbian is not taking credit risk. Orbian buys the confirmed Receivable asset and send the money; financing is assured. Orbian then sells Notes secured against that payable into the Capital Markets. Investors never have to look at the SME. Investors simply look at the credit rating of the Corporate Buyer and the length of the loan and price it accordingly.

Investors can be anybody who wants high credit quality, short term self-liquidating assets priced at LIBOR Plus. Typical investors are Banks and Corporates. Orbian does not run auction processes. They experimented with that but found that it was better to manage it on a relationship basis so that investors can be confident of getting enough volume on a consistent basis. This is a market where the supply of borrowers is more of a constraint than the supply of capital.

Orbian view themselves as a financing company enabled by technology rather than a technology company with application in finance. It is a subtle difference as both models tend to converge on the same end result.

What will drive future growth?

SCF clearly works. It has been around since 1999. What I wanted to know was what will drive future growth? Tom uses one word to describe this, which is “execution”. The SCF concept is simple to understand and the technology is no longer leading edge. There are almost no barriers to entry. That has brought in many market entrants who have confused the market. What matters is:

  • Confidence from Buyers, Sellers and Lenders that they will be paid correctly.
  • Ability to onboard new Buyers quickly (a few man days max).
  • Ability to onboard new Sellers quickly (software as a service via a secure portal).

The last two points are why a third party such as Orbian does well. Many banks offer SCF and the payment part can be licensed on a white label basis. However, the last two points are about customer service and that is where banks have usually struggled. Customer service is that intricate balance of people, process and technology that Tom sums up as “execution”. It is easy to say, but hard to do.

That is why growth is now coming from corporates who have long understood the conceptual value of SCF but have struggled to realize the benefits due to weak execution.

What about Blockchain and SCF?

Tom’s team at Orbian has spent time and resources looking at Blockchain and how it could apply to SCF. There are some interesting similarities on an abstract level.  SCF and especially Orbian’s offering rely on a collaborative effort between the participants of every SCF programme they offer.  In a similar way, distributed ledger technologies rely on collaboration between participants to reach a mutually beneficial result.

Tom understands how Blockchain works and what it could do. He can see the potential application to physical supply chain and therefore to Trade Finance. However for Orbian’s business, Blockchain is not a game-changer. The SCF model does not rely on knowledge of where something is in the supply chain. The Corporate Buyer needs to worry about that, but Orbian gets involved at the point in time when Corporate Buyer has approved an invoice. By that time the Corporate Buyer must know where goods are in the supply chain.

It is theoretically possible to envisage a decentralized market without any intermediary, however there are more obviously broken markets to go after. The relative efficiency of SCF evidenced by the 150 bp spread over LIBOR means it fails the Jeff Bezos test (“your fat margin is my opportunity”).The main parties of the SCF model (the buyer, the supplier and the funders) need  Orbian to play an intermediary role. Without it, the efficient aggregation and dissemination of necessary receivable information would be impossible.

Distributed ledgers, irrespective of their permission type, rely on a network effect to both be able to reach transaction validation consensus, secure the immutability of the platform and protect it against malicious attackers.  Although some new organisation can very well develop the next Blockchain platform, if social consensus does not enable it to be adopted by the intended users, it will not succeed.

Some parts of the capital markets are hyper efficient but rely on certain constraints – such as regulation, legal jurisdiction. It is unclear that Blockchain brings a lot of value in return for all that risk.  Code-is law is an interesting concept but big hyper efficient markets don’t like experimenting with interesting concepts (translation = “unknown outcome”).

Or, as Tom Dunn puts it, execution matters.

Orbian is not following the Bank’s lead in spending $ millions on Proof Of Concept projects. They prefer to analyse the risk/reward on a fundamental basis and for them today Blockchain falls into the watch and wait category.

What markets have been early adopters of SCF?

Markets that are active include:

  • Industrial Manufacturing
  • Transportation
  • Food
  • Renewable Energy

Markets that are less active than anticipated are Services and Government Sectors.

What global corridors are the most active in SCF?

The biggest market today is US domestic i.e. US to US trade. While there is a lot of attention on cross border trade, the market today is primarily domestic and follows GDP – so after America come markets such as Germany, UK and China. While supply chains are global, the last link to an investment grade corporate buyer, is more often domestic.

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Small Retailers need disruptive Fintech to reduce working capital finance

mom & pop

By Bernard Lunn

Small retailers are the backbone of the economy and yet they are the last place getting value from Fintech innovation. This is a massive opportunity, but not an easy one to crack. It needs some disruptive innovation.

Working Capital Finance for small business is the massive market we have been focused on this week in two earlier research notes (here and here).

We see three distinct categories within the overall market for Working Capital Finance for small business. I hesitate to call them niche markets because they are so big:

  1. Supplier to Global 2000. This is where Supply Chain Finance (SCF) rules. This works. You get credit based on the credit rating of the buyer, so the APR is low.
  1. Supplier to SMB. This has historically been the province of Factoring (or a variant called Invoice Discounting). The APR cost is high and it can be a cumbersome process, because neither the buyer nor the seller has a credit rating. There have been many markets to trade these invoices, but the biggest conceptual breakthrough has been the move by Prime Revenue to to go beyond the Global 2000 (which already have a credit rating) into the mid market using statistical modeling based Insurance as a proxy for an individual credit rating by partnering with AIG.
  1. Supplier to consumer aka Retailer. This is the world of Merchant Cash AdvanceThe merchant gets an advance on future credit card revenue. The APR is even higher than for Factoring/Invoice Discounting. It is like PayDay Loans; it is 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 in this space.

Big Retailers obviously do not use this; one cannot imagine Walmart using merchant cash advances. That is why this research note is about Small Retailers, the backbone of the economy.

One thing that confuses people across all these types of working capital finance is that lenders often quote a rate for say 30 days. This could be the time when the invoice would normally be paid or when a merchant cash advance is collected from future credit card receipts. You might hear 2% quoted (for 30 days), but that translates to 24% APR (12 months * 2%). Some lenders and platforms fight against this normalization to APR, but only a desperate or financially illiterate borrower would fail to calculate APR.

The fitssmallbusiness site lays into merchant cash advances;

“Typically, merchant cash advances are extremely expensive with APRs ranging from 29 % to 132 %, so we don’t recommend them unless you’ve exhausted all other ways to get a business loan.”

So is there any alternative to merchant cash advances? One can see Square jumping into the fray with Square Capital and that will create competition, which is good. However that sort of sustaining innovation tends to produce something like a 10% improvement. When retailers are paying 29 % to 132 %, they need a lot more than 10% improvement. They need a disruptive proposition that cuts that APR by 90%. That would let retailers borrow at 2.9% to 13.2%. That seems ridiculous, but all disruptive innovation seems ridiculous when it first appears. Of course the lower amount of 2.9% is only for the best quality credit worthy retailers (which seems reasonable given our ZIRP base rate foundation). The problem is simply that there is no efficient scalable way to measure credit worthiness of retailers. If anybody has seen something like this, please tell us (in comments or on Twitter).

Daily Fintech Advisers provide strategic consulting to organizations with business and investment interests in Fintech.


How Lending Marketplace hyper-growth is changing Supply Chain Finance



By Bernard Lunn

Supply Chain Finance is one tool within Working Capital Finance. Yesterday we looked at how Banks are losing out in this massive market.

Today’s research note explores how the hyper-growth phase of Lending Marketplaces (which we describe here) is fundamentally changing Supply Chain Finance.

Innovation keeps on coming in the working capital finance market. We are in the Cambrian explosion phase, not the consolidation phase. We are seeing new startups, new entrants coming from adjacent markets, early stage players globalizing and strategic moves by established players.

  • The latest startup in this space is Advanon, an invoice marketplace based in Zurich.
  • The adjacent market entry move is from Kyriba, a leader in cloud based Treasury Management Systems (TMS). Kyriba is moving into Supply Chain Finance (SCF) by appointing a senior manager to lead that initiative. This adjacent market move makes sense because the people who make a TMS decision also influence and execute an SCF decision.
  • There have been two leaders in Supply Chain Finance that have been building for over a decade – Orbian and Prime Revenue. The latter made a big strategic move by partnering with AIG to move beyond the Global 2000 (which already have a credit rating) into the mid market using statistical modeling based Insurance as a proxy for an individual credit rating.

Our market thesis in this research note is that the fundamental change driving this is the hypergrowth phase of Lending Marketplaces.  A Lending Marketplace serves an ecosystem on both sides of the transaction:

  • Lenders, via an ecosystem of Wealth/Asset/Fund Managers.
  • Borrowers, via an ecosystem of sales and origination specialists.

Some of the early players in Working Capital Finance tried to be a network. That game is over. The Lending Marketplace game is a winner takes most network effects game driven by liquidity. Lenders go where the borrowers are and borrowers go where the lenders are.

What we are seeing today is an explosion of innovation around the sales and origination side of the Lending Marketplaces. These sales and origination ventures don’t need to worry about finding Lenders. They are out there on the other side of the Lending Marketplaces, hungry for assets. All they need to think about is generating a flow of good quality borrowers (aka assets in lending speak).

Daily Fintech Advisers provide strategic consulting to organizations with business and investment interests in Fintech.

What the 70% decline in Tungsten Networks price teaches us about the future of working capital finance

By Bernard Lunn

When Tungsten Networks did their IPO on the London market in October 2013, I was involved with a project in working capital finance. Tungsten was the big story that got everybody’s attention.

The story was plausible and the entrepreneur telling the story was charismatic. So the IPO was a success. A few wise folks in this business whose opinion I respected cautioned me that it was not as good as it looked on the surface.

At listing, the share price was 225p. At time of writing it is below 60p, a decline of over 70%. Ouch. The market cap is about $120m, way below our $300m cut off to be part of our Daily Fintech Index.

Two years later with a share price down 70% since IPO, there are two possible explanations:

  • Either flawed execution
  • Or the basic thesis was flawed (strategic error).

(I don’t buy the “short sellers ruined my business” story. AFAIK, this was not naked short selling, which Patrick Byrne rightly complains about.

Strategic error or flawed execution?

The answer matters because working capital finance is such a huge market opportunity and one that matters to the broader economy (a healthy small business sector means a healthy economy). If this was simply about market share battles for a feature within ERP (e-invoicing) it would not be interesting.

The market thesis that got people excited by the Tungsten Networks IPO is that if invoices are sent digitally, it becomes possible to arrange financing for invoices using techniques variously described as Supply Chain Finance, Reverse Factoring or Approved Payables Finance. The logic is simple. If an invoice is approved, the financing APR % can be based on the credit rating of the buyer. This can dramatically reduce the financing cost.

Based on this insight, a hard-charging entrepreneur with a strong track record in the City of London called Edi Truell created an acquisition vehicle financed through a public listing and brought together:

  • OB10, a leading e-invoicing company
  • FIBI Bank, the UK division of First International Bank of Israel.

The combination of e-invoicing and a regulated bank seemed like a far sighted strategic play and the IPO was a success.

Two years later it looks more difficult. Tungsten Networks could still become a big success story. They do have some of the pieces to be a big winner in a huge market, but it looks like they faced three issues:

  • The 95% bar is tougher in practice than in theory. The 95% bar is the idea that to take big costs out of Accounts Payable, you need 95% of invoices to be digital. If you Google Tungsten Networks, you see an ad from a competitor (Taulia) saying

“Time to make 95% adoption a reality”.

I don’t know whether Taulia is achieving that 95% bar. It certainly indicates focus on the issue and confidence that they can deliver.

95% matters not only because the buyer can then take a lot of costs out of Accounts Payable. It also matters because then the buyer can offer lots of invoices up for financing. Whether the seller wants financing is their call and will be price (APR %) dependent. Which brings us onto the next point.

  • You don’t need to own the cow in order to get milk. Owning one bank simply gives you a regulated entity. However unless that bank can raise money very cheaply (because it has millions of low cost consumer deposits), you are still reliant on networks for financing. This is where the hyper growth phase of lending marketplaces (with Lending Club, Prosper and now SoFi competing head on) is so significant. The lenders are out there, at scale, and hungry for high quality assets at a reasonable price.

The biggest issue for Tungsten Networks may have simply been timing. With marketplace lending moving mainstream and America starting to move to digital invoices, the time may finally right but it is likely that a different company will seize the day.

Daily Fintech Advisers (the commercial arm of this open source research site) can help implement strategies related to the topics written about here. Contact us to start a conversation.

$225m into AvidXchange shows the American B2B paper payment dam maybe breaking

AvidXchange just closed a $225m round. Why would a bunch of very smart investors put $225m into something as boring as Accounts Payable software for small business? These are top tier investors:

  • TPG

TPG is a leading global private investment firm…

  • Square 1 Bank

entrepreneurs serving entrepreneurs

  • Keybank

Cleveland-based KeyCorp is one of the…

  • Nyca Partners

FinTech Venture Capital

  • Foundry Group

Foundry Group is a venture capital firm focused…

  • Bain Capital Ventures

Venture Capital & Growth Equity

Visitors to America, the source of so much of the technological innovation that drives our world, are often amazed by how backward B2B payment processing is. Accounts Receivable in a Supplier sends printed invoices by snail mail to Accounts Payable in a Buyer who keys in the data and then prints and sends a check and then….

Working Capital Finance is one of the biggest market opportunities in Fintech and none of those dreams are realizable unless invoices travel digitally.

New working capital finance models are getting traction today when the buyer is a big company which tells its small suppliers to issue invoices digitally. This has enabled Supply Chain Finance (SCF) to take off.

However small suppliers selling to a big buyer is only one part of working capital finance. Most small suppliers sell to small buyers.

That is where AvidXChange comes in. They are automating Accounts Payable processing for small business. The main way to automate Accounts Payable processing is to get your suppliers to send invoices electronically. If that starts to happen the great American B2B payment dam may finally break. When it is perceived that the norm is to send invoices electronically, the laggards still using paper will quickly follow. Then working capital finance will finally be revolutionized. My theory is that $225 million is the vote with the wallet from a bunch of smart investors that this is about to happen.

3 reasons banks are missing the massive opportunity to service small business

By Bernard Lunn

Small business lending is a market window of opportunity big enough to drive a truck through. It is also a perfect fit for “rebundling“; business finance is too complex for point solutions. Small businesses need banks and banks need small businesses as digitization disruption hits their consumer revenue line.

Massive need on both sides and still nothing…

Serving small business would also be a big PR win for those “evil bankers”. If there is one thing we can all agree that bankers should be doing, it is lending to small business. Banks could get regulators off their backs and polish their faded brand.

There are three things stopping banks from seizing this huge opportunity:

  1. Banks don’t see themselves as being in the service business. Who can blame them? Good service is harder than simple transactions. The trouble is, digital disrupters are taking those simple transactions down to zero price using Moore’s Law….
  1. The middle child organization vacuum. Banks have units and scalable business models to sell to Big Corporations (oldest child) and Consumers (youngest child). Small business is stuck in the middle and ignored. The way to overcome that is creating an Intrapreneurial venture within the corporate ownership structure but freed from the constraints of “this is how we do things around here”.
  1. The lack of a simple executable strategy. This is what we address in this post.

Banks are not the first to find the small business a difficult market to crack. It used to be a big problem for the IT business as well. In the olden days, IT meant selling technology to big companies. This meant long expensive sales cycles but with a big reward at the end. Then we had the Internet driven B2C revolution – lots of tiny transactions with short/cheap sales cycles.

Small business was the problem market for IT. Sales cycles were still long. Small business owners still viewed each decision as critical and complex and so insisted on taking their time. Yet the reward at the end of that long sales cycle was far less than in an enterprise sale.

Then along came the Cloud and Software As A Service. This dramatically changed the economics of delivery. Then Social, Analytics and Mobile changed the economics of marketing. Suddenly small business IT was viable and forecast to grow faster than overall IT spending according to Gartner.

A few weeks ago, Rick Huckstep covered Zenefits, one of the fastest growing SAAS ventures ever (a staggering 30% month to month). Their innovation was to offer the HR software free and monetize via a 5% finders fee from Insurance companies. This is also happening in the market around e-invoicing and Accounts Payable Automation, where the monetization is coming from a slice of the short term working capital financing.

Free financial software monetized through financial transactions – that sounds like a scalable business model. It requires banks to think outside the box, but that is actually quite cheap. Banks need to stop thinking of their IT as simply enabling a banking transaction.

Banks need to see a banking transaction as a bye-product of a software solution that solves a problem for small business.

Daily Fintech Advisers (the commercial arm of this open source research site) can help implement strategies written about here. Contact us to start a conversation.


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.