Cloud computing is slowly infiltrating financing products, helping to awaken financing tools that have remained dormant for decades.
Invoice factoring, debtor finance and invoice discounting are all iterations of receivables-based financing or asset-based lending that the Debtor and Invoice Finance Association has reported reached $62.9 billion in turnover for the 12 months ending March 2015. It’s a financing tool that remains relatively stagnant in the mechanics of how risk is assessed and funding is accessed by sellers (borrowers).
The basic principles of financing is one where a business sells goods or services on credit terms, creating unpaid receivables that can be used as an asset to raise working capital against until the receivable is paid by the end customer. It is a very effective financing tool to close cash flow gaps and a healthy accounting option for off-balance-sheet financing.
Growth of cloud accounting & add-ons
Major accounting software providers are slowly downgrading support for offline legacy products in favour of online versions where updates can easily be rolled out and developers can contribute, building amazing add-ons to attract more users to the ecosystem. Adding to this, are the numerous start-ups both in Australia and abroad that don’t support any offline functionality.
Whole businesses have been built on the back of connecting to these platforms, accessing business data and improving efficiencies. One provider has over four hundred add-ons, from inventory management, receipts to collecting invoice payments. The most effective add-ons literally work as it sounds, they continually add value to the business owner and are used as an extension to the accounting software.
But where are the lenders? If you search for lenders on any of the Australian cloud accounting provider sites, lenders are non-existent and probably for good reason. It makes sense for accounting platforms to include only add-ons that deliver real value to their users and lenders are still trying to figure out how to deliver that value.
Over the past twelve months there have been some lenders that are using cloud accounts to authenticate users with data, allowing them to confirm turnover, payables, receivables etc. however using this data on-going and staying connected is not a requirement and to a major extent does not lend itself to engaging the user both in the accounting providers platform and the lenders from day to day.
— Waddle (@getwaddle) September 1, 2015
Enter the Receivables Financing add-on
The receivables of a business are a floating or fluid asset, meaning every day they change. Invoices are raised and payments are reconciled, this process is replicated in any business that sells on credit terms. To add to this most accounting applications support a “bank feed”. This links to a client's trading account and pulls in all transaction data for reconciliation purposes, removing the need for business owners to download statements and process manual entries.
To any outsider, traditional Receivable based financing is very clunky and administratively heavy. Clients are required to send financiers’ copies of invoices, upload details to the financiers’ software and reconcile the financiers’ payments as well as their own customer payments in the accounting software. Clients are also subjected to monthly and quarterly audits; requesting up-to-date accounts, bank statements, P & L and payables reports amongst others. There are products in the invoice discounting space that have cut down significant processes, however still fail to deliver a simple product free from any frustration.
How can this be automated? Accounting data is the all seeing eye of business activity, add to this bank feed data and you have a pretty holistic real-time snapshot of how a business is trading to allow for automated business loan approvals and on-going financing. For a lending platform to be an effective value add-on to a cloud accounting providers repertoire it will need to deliver value more than just once. As I said earlier, receivables are a floating asset; business owners create new ones and close out old ones each day or week delivering potentially new assets to raise working capital against after the client has reconciled accounts. Lenders can audit clients on a day-to-day basis in real-time without any disruption to borrowers, instead of requesting heavy documentation or requiring the borrower to take any action. Effectively lenders will be allowed to see new invoices raised at any time to make funding available to business owners without adding any further administration above what they are already performing in their accounts.
Are we there yet?
Adoption of lenders is slow, legacy systems prevent change and investment in building propriety software is very expensive and time-consuming. There’s another roadblock and that’s take-up of cloud accounting by business. Momentum is gathering, however relative to the amount businesses utilising offline systems, it’s still got a way to go. Businesses generally don’t like change, however if it becomes a necessity to move online to get access to new valuable services, then we should see an even larger increase in business owners adopting the cloud.
Lenders and especially individuals that wish to move into the receivables funding asset class will need to be well equipped with extensive knowledge into asset based lending underwriting skills and be fully aware of the risks involved in the portfolio management that is required on a day to day basis due to the floating nature of the asset.
Financing add-ons will drive more take up
Awareness from cloud accounting providers of the immense value lending add-ons can provide to their users has begun to take shape. Truly valuable lending add-ons will keep business owners engaged in cloud accounting platforms, driving uptake to get access to new financing options that offer frustration free ways to raise working capital against their on-going receivables, close cash flow gaps from late paying customers and drive growth.