Understanding the nuance of invoice financing

kevinAn official with the world’s largest capital exchange says despite the obvious drag outstanding invoices have on business growth there are remarkably few options available for companies looking to accelerate their access to that capital.

Kevin Daniels is the Chief Product Officer for C2FO. He says that an any given time there is $40 trillion in outstanding invoices worldwide.

For many companies, especially younger ones just starting out and those with irregular cash flow patterns, that outstanding capital is needed to cover the everyday expenses of their business such as rent, payroll and their own invoices.

Yet many invoices are not due for 60 days, so they have to wait.

If the company determines they need the money sooner, their options are limited, Mr. Daniels said. Supply chain finance loans, invoice factoring and more standard loans only service five percent of the market, leaving the remaining $38 trillion with few options before C2FO started operating five years ago.

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Many loans charge high rates which force many small business owners to make difficult choices about how much they want to spend to unlock that capital. Whether they wait or take the loan, their growth potential is impacted by the high cost.

That is one half of what Mr. Daniels calls the liquidity paradox, which can be thought of as a tall fence completely blocking the view on the other side.

On the opposite side from business owners seeking working capital are large companies sitting on stockpiles of cash they would like to use to produce some type of positive return.

“Banks have cash and some are reluctant to accept deposits,” Mr. Daniels explained. “In some places they are giving negative yields.”

So you have people with money looking to generate income on one side and people needing an affordable option on the other.

These are the two groups C2FO seeks to unite, Mr. Daniels said.

With the current gap between what the small businesses pay for other options and what it costs potential funding sources to access it, there is plenty of room to agree on a middle ground. SMEs often pay 12 percent to access alternative sources, while Fortune 500 companies have a two percent cost of capital.

Ten percent is plenty of middle ground.

The process begins with companies submitting invoices they are willing to pay early while indicating the rate of return they wish to realize for doing so.

Suppliers log into C2FO and submit requests for early payment on specific invoices.

C2FO works because more than one million companies are registered with the network, Mr. Daniels explained. That allows the benefits of early payment to filter down to more levels.

Say Costco is willing to pay some invoices early and indicates that in C2FO’s system. A large supplier accepts early payment.

Costco generates a better return than letting that money sit in the bank for 60 days. The large supplier now has some additional liquidity it may deploy to pay one of their suppliers, who can then pay one of their suppliers.

If the supplier at each level is a C2FO member, this series of exchanges can happen quickly, Mr. Daniels explained.

C2FO’s technology matches suppliers and buyers each day, with matches clearing at 10 a.m.

Companies like the process, Mr. Daniels said. The supplier recommendation rate is 91 percent. The average supplier submits 97 percent of their invoices and accesses C2FO 80 times each year.

“C2FO has facilitated access to more than $15 billion in early cash since 2010,” Mr. Daniels said. “That is more than 100 million days of early payment.”

With $2.8 billion of that total coming in the first quarter of 2015 alone, C2FO is clearly growing.

Mr. Daniels said the best part of the job is hearing the feel-good stories about how companies benefit from the early access to capital.

“Roughly 95 percent of that capital gets reinvested into the company,” Mr. Daniels said. “It may be used to hire, market the company or to smooth out peaks and valleys in their sales pattern.”

Even though many companies sorely need that capital (and 20 percent report customers often pay late), 45 percent report being uncomfortable asking people to pay early. C2FO makes it easier to make such a request.

C2FO has announced a global partnership with Tradeshift, a global supplier collaboration platform. They receive access to more suppliers who are already working with Tradeshift. Tradeshift can then offer their clients the opportunity to increase their EBITDA by paying those invoices early.

Companies using Tradeshift receive invoices by various methods, from fax, to mail to electronically, Mr. Daniels explained. Tradeshift simplifies the process by creating the mechanism by which a company can have all their suppliers submit invoices electronically.

Tradeshift members can now create, submit, and request those invoices be paid early, Mr. Daniels said.

It is a boon for C2FO, as they have the ability to promote their services directly to Tradeshift clients. Once one registers C2FO can directly promote to that network too, Mr. Daniels said.

“Fundamentally we are tackling the process from creating an invoice to getting paid,” Mr. Daniels said.

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