Saturday, January 30, 2010

Supplier Credit Crunch: Opportunity for B2B Players?

Jan 30, 2010

Financing
The credit crunch has hit the suppliers, particularly the smaller ones hard. When the banks are not able to provide adequate lines of credit, these suppliers turn to smaller financing players (ones who provide factoring and others who provide purchase order financing). This market is a fragmented market. B2B providers (Sterling Commerce, Innovis/GXS, and e2open), working with banks and the OEMs, can profit from this. Why are so few doing it?

Denied
CIT Group, that made most loans to small business, declared bankruptcy last November. Even before that the  CIT group had been decreasing the new loans that they were offering.  A NYT article claims that "Small-business owners say banks routinely reject applications for loans that were readily available just two years ago." According to the Entrepreneur, " In the first six months of 2009, 38 percent of small businesses reported a decrease in their lines of credit or credit card limits, according to the National Small Business Association. More than 40 percent of small-business owners who had requested extensions of their credit lines were turned down, the National Federation of Independent Business reported, and many of those who received extensions were required to increase collateral, pay higher interest rates and/or agree to more stringent terms."  All these are problems that are going to persist past this recession given that the organizations which small businesses turned to have disappeared and new ones are going to take time to appear.

Pull money out of a hat
Suppliers are turning to alternative financing schemes. One of the most common ones is factoring. Factoring is where the financing company buys up receivables of a company at a discount and get paid when the customers pay the invoices. Factoring provides companies with quick access to cash instead of waiting for the slow-paying clients to pay up. As customers have faced their own need to preserve capital, they have pushed out the payment terms making this even more attractive. Another alternative financing scheme that is starting to pick up steam is purchase order financing. Purchase order financing is where the cash is made available when the purchase order is received and finances, in addition to the part covered by factoring, the procurement, production, and transportation of the product to the customer.

The challenge for the suppliers is that the companies providing these alternative financing schemes are small even though the total volume just in the US is in the 2 to 7 billion dollar range. They have no idea of the history between the customer and the supplier. So they have a high overhead because of the due diligence as part of the loan origination process. The B2B companies have the history. They have access to the individual transactions through the life cycle of the transaction. It makes a lot of sense for them to work with a few banks and the OEMs to provide the financing with a lot less overhead. The overhead and the profit of the small alternate financing providers can be shared by the OEM, the B2B company, and the bank.

The only B2B company that seems to be dabbling in this area is GT Nexus. In the mean time, there are start-ups getting into this space. One of them I came across is "The Receivables Exchange," touting itself as eBay of working capital. It is an online marketplace for real-time trading of accounts receivable, allowing small and mid-sized businesses to gain access to working capital at a competitive cost.

Thoughts on the opportunities for B2B companies in this arena?

Karthik

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