Better Working Capital Management with Receivables Financing and Factoring

[0:00] Anchor:

Thank you for joining today’s session, we’re going to be having a panel discussion on better working capital management with receivables financing in factoring. Today, we have four panelists, and they are Aditya Menon, who is the CEO of Tallyx. We have Ravi Akula, who is the managing director, head of global trade finance and solution sales at BNP Paribas. We have Abhijit Prasad, who is the Managing Director and Chief Product Officer at GREENSILL. And we have Chuck Schultz, who is SVP of business development at Credit Management Association. Our moderator today is Vikram Gollakota. He has over 13 years of experience in consulting and implementation of SAP solutions in North America and Europe. Vikram has worked for corporations in various industries, including consumer goods, pharmaceutical domains, agriculture, retail, and food processing. So with that being said, panel, the stage is all yours.

[1:02] Vikram Gollakota:

Thank you. Can y’all hear me okay? I’m loud enough, but just to be sure. Thanks for joining us. I know everybody got the IV shots, there’s an IV station if you need them. Receivables financing is a very interesting topic for all of us. And thanks for the panelists who took the time to come here and talk to us. I’m going to start with you, Chuck. I’m going to give us the lay of the land but there are so many terms used out there? There’s factoring, financing, or discounting. So if you can, in a couple of minutes, explain what these are in layman’s terms.

[1:41] Chuck Schultz:

So when you’re looking at your receivables, in the end, you need to speed up your cash flow. One of the major ways that actually is very prevalent in Europe but not quite so much in the US is ‘factoring’. In effect, you’re paying a fee to get your cash sooner. One of the major factors that no one ever really considers is when you accept a credit card, Visa MasterCard, you’re paying a 3 to 4% fee, but you’re getting the cash immediately. So that’s a form of factoring. Another subset of factoring just to keep this relatively simple is something called invoice discounting, factoring takes in the total receivable portfolio, and you’re actually working with someone on a monthly basis, usually, you’re selling your entire portfolio to them for a guaranteed rate on their end. It has to be a consistent sale, selling every month of some size, say $100 to $200,000 a month minimums and invoice discounting actually goes a little bit differently and you can sell an individual invoice. You can get down to the point where you’re selling up to say 50% of your receivables on one invoice if you had a major sale. So those are some of the different forms but when you’re really comparing this, just think of it in terms of Credit Card, when you’re taking your credit card for your payments, that’s the same thing as factoring. The only difference is, instead of a credit card payment, you’re invoicing, and you’re collecting cash immediately on an invoice and then paying a fee for that.

[3:15] Vikram Gollakota:

Thanks, Chuck. Let’s move on to the type of factoring solutions or financing solutions. And I just did a Google search and I found so many, there’s recourse, there’s non-recourse, there’s limited recourse, the securitization. It all goes over my head, so maybe you can give me what they are and maybe a few minutes about the pros and cons of each of them.

[3:40] Abhijit Prasad:

Can you hear me? Okay? So, receivables are probably for most companies, the best assets that they’ve got because they’re liquid, they can be kind of monetized into cash. And, I think the three key things which companies need to think about when looking at receivables. First is what’s the reason why they’re doing it. Is it for liquidity purposes? Or they just need the cash? Is it for risk purposes? Or whether the kind of concerned about the customers paying them? Or are they looking for some balance sheet accounting play? And, these three kinds of attributes will determine what kind of solution that a company will actually go for. So if you know if you’re looking just for liquidity, and all you care about is getting the cash up front, you actually don’t care whether that you get the risk of your books and you don’t care whether there’s something on your balance sheet, then you can go with any of the methods and you probably go with the one which is the most cost-efficient way of doing it for yourself or for yourself. And that will depend upon whether you are better rated than your customers or your customers are better rated than you.

[4:44] Abhijit Prasad:

If however, you’re doing it for risk purposes, where you’re concerned about the customers not paying, then you probably want to look at a nonrecourse or limited recourse kind of solution where the risk passes from you. The customer’s payment responses from you to the funder of the financier and so you get that risk off your books. And then if you’re looking for something which is balance sheet driven, which is you’re looking to clean your balance sheet so you replace your receivables on your books with cash, then you look for specific solutions which give you balance sheet due recognition of the receivables. And so those attributes will then determine whether it’s recourse which means you still carry the risk, limited recourse where you carry the risk for disputes or credits, but for clean payment non-payment, you pass the address to the financier or if it is nonrecourse where you pass all the risk on to the financier. The last one is securitization which you talked about. I think that completes the set because securitization is a way of providing cheap access to financing for companies who actually not that great credit-rated themselves because their receivables can be in kind of the CDO form. Be tranched and be sold to Financiers who can take that risk of them?

[6:03] Vikram Gollakota:

Thanks, Moving on to you, Ravi, you’ve been doing this for a while. So I’m going to go a little different here. Not just focus on receivables in general. There is dynamic discounting that some of us are familiar with. And then there is Supply Chain Finance. What’s the difference?

[6:23] Ravi Akula:

Before that, can I actually add, what Abhijit was talking about? Because I’ve been a product manager, and now I do the sales also. And I did implementation as well. Very simply speaking, it is actually when you look at it from a buyer’s perspective or a seller’s perspective. So when you look at it from a buyer’s perspective, which again, will answer the question that you asked, the buyer is actually taking the course. So all the receivables are actually recourse to the buyer. Whereas if you look at the seller centric solutions, where a seller is actually coming and actually asking you to Finance your invoices, the banks generally do a limited recourse to the seller. And the recourse is actually to the buyer but through the seller. So that’s how the entire financing happens, you agree with that.

[7:15] Ravi Akula:

So now coming back to the question on dynamic discounting and finance, actually, they are the same. The only difference is that there are two parts, one is the funding. The second one is the process flow. So on the funnel, but in a dynamic disconnect scenario, where you can also call it an early payment scenario, the buyer is actually funding the invoices of the sellers. In the sense, a seller can come up with an invoice and say, “Okay, if you pay 30 days in advance, take a 5% cut, or you pay 60 days in advance, take a 10% cut.” So this funding is essentially coming from the buyer himself. Independent submission, finance the funding is actually coming from a financier it could be a banker. It could be any other securitization that Abhijit mentioned about, it could be anybody but not the buyer. So now, when you talk about the process flow in a dynamic discovery scenario, quite often, the process moves between the buyer and the seller through an intermediary, it could be HighRadius. But generally, the interest rates are very high.

[8:25] Ravi Akula:

But do you think the biggest suppliers go for dynamic discounting? No, normally the medium and small suppliers go for the dynamic discounting. Whereas if a company established in finance, this is actually kind of market-driven. The interest rates are controlled. So you can’t just hoodwink anybody saying “Okay, hey, I’m going to charge you five or 5% margin on the top, because it’s all controlled in the sense. But in a separation finance scenario, the process flows between the buyer, seller, and the bank. So the bank actually finalizes the pricing based on the bias credit rating. In that case, they don’t care about the credit rating of the seller. And the recourse is to the buyer, and the most important part is that in a submission finance scenario, the payments that are actually coming to the bank for financing got completely approved, and there is an undertaking by the buyer to make the payment on the due date. But in a dynamic data discovery scenario, it is between the buyer and seller, so, the invoices come from the seller, the buyer actually doesn’t need to even approve the invoice. Okay, I’m going to focus on the discount, I can pay him now. I’m cash surplus, I make payment. So that’s a difference.

[9:29] Vikram Gollakota:

Thank you. Yeah, it does make sense. So, Aditya, you’re a tech company. So where do you fit in all of this?

[9:48] Aditya Menon:

Yeah, I think it’s probably good to step back and focus on what the technology is trying to solve. So let’s just look at the global stats today, WTO total demand for 30 to 120 days financing globally- 10 trillion. In India alone, unmet demand for SME financing on an open account basis is about 26 trillion rupees, which is about $350 billion of unmet demand, which means that these guys need to go to shadow banking to get financed, which starts at 18, most about 36%. So, the first step for the supplier, is how do you get them included in this chain where there’s dynamic discounting or approve financing factoring or securitization, it doesn’t really matter. So, the first step is how do you get there? So, one of the key things you need there is the ability to do instant digital onboarding, right. That’s really, really important because not the infrastructure. Everything else is a pipe dream. The second thing is to understand the current market dynamics.

We lose the mic there. Okay, now, we’re back now. So in the market dynamics, the buyers are trying to do probably one of three things. One is basically extending payable outstanding. Also, buying the supply chain closer to them, particularly where you have today shifting sands, trade wars, etc. So, from a macroeconomic perspective, you really need to figure out how you can be super-efficient on the financing end of your supply chain, and also reduce the cost of goods and services, right. So this is the macroeconomic scenario that we’re trying to solve for with technology. So there’s been a lot of different angles to it. So one is focusing on using blockchain to look at the logistics and documentary part of it. And that’s being handled by people like IBM and Maersk with the trade lands platform, which is a blockchain Consortium.

[11:54] Aditya Menon:

There are four other large consortiums, there’s Marco Polo, there’s We Trade, there is a Voltron. And there is Congo. Of these four platforms. The only one that’s seen absolute liftoff is Congo, which is basically using blockchain for post-trade settlement of commodity trading. The other one’s today are going very, very slow. So the adoption rate for this has been slow because a huge number of stakeholders are trying to get everybody involved in the trade lifecycle on board. And that’s it’s moving at a snail’s pace. The only exception probably is Thailand, who’ve created a blockchain platform for bank guarantees and standby letters of credit, which is absolutely rocking. Now if you look at this scenario, our perspective is that there are two key technologies that you need to apply to solve these problems, one is Artificial Intelligence. And companies like HighRadius have done a fantastic job in using AI to process all of the invoice purchasing and supporting documents to provide an AI-ready base for you, which you can operate on. Other examples of Traydstream in London provide AI-based machine learning engines, basically, verification of trade documents to look at whether they are actually authentic or not. Because the whole idea of blockchain is to create a trustless ecosystem. I know the word trustless means you think is without trust, but it’s without a trusted in need for a trusted intermediary. Banks today make $18 billion today on transaction revenue, which we think should be handed back to you, the industry.

[13:30] Ravi Akula:

So, if you don’t mind, I think my mic is working. So, I would add a different angle to the question that you asked about because what Aditya mentioned is brilliant actually. So let me give a different angle to this technology on Supply Chain Finance or receivables finance is that practically speaking, we are looking at a technology platform similar to that of HighRadius where the connectivity is there, the buyer-seller or the funder, right? So I’ve been in this collaborative space with FinTech for almost four years now, what is emerging is that everybody’s looking for a one-stop-shop. So, this is actually reducing the implementation time, which used to be in a bilateral scenario, the implementation of any Supply Chain Finance or any other finance used to be about three to six months. Now with the one-stop-shop, suppose companies like HighRadius, this is fronting buyer and seller, implementation could be as less as one month. I mean subject, of course, the signing of the documentation. So this is a very important thing that the corporates need to understand, you can go directly to the bank, you can get the funding, but suppose you have a service provider. Like HighRadius, I think it’s always better to check with them simply “Hey, can I get some financing through you?”: So that’s what I wanted to add.

[14:54] Vikram Gollakota:

So, Abhijit, you’ve worked with a lot of enterprise clients. A lot of large clients, what do you think is changing in their operational processes? Because if there is financing involved, do they have to change anything?

[15:08] Abhijit Prasad:

Yeah, no, I maybe I’ll expand that. What to think of various implications of doing financing. So operational is clearly one of them. And I think something to what Ravi said, there have been financing providers who’ve got platforms. And then a client can have 10 different platforms to do different things. They’ve got a platform for receivables management, and that’s a lot of what HighRadius has done, kind of integrated that. And, we think the way to get a move forward is to integrate even financing into that play. So you got financing. It’s a one-stop-shop, as you said, you do all kinds of management of activity on one platform, which removes some of the operational burdens that exist. If you’ve got multiple platforms, you need to worry about changing bank accounts here and there. And so kind of putting everything into one platform adding financing into that we think is the way it’s going to move forward.

[16:00] Abhijit Prasad:

The other kind of implication which I think is useful to note is as you put financing in place and those of you who’ve got banking partners you know that you got all kinds of things that you do with banking partners, you’ve got your revolving lines with banking partners, you’ve got lines for effects and for interest rate hedging and all kinds of stuff that you do with them. Anything that you do in terms of financing even this is working capital financing is going to eat into a finite pot that exists with the bank for you. And therefore, you got to think about other ways in which can you access other pools of liquidity, which have not traditionally been made available to clients like yourself because it’s either sitting with funds, hedge funds or pension funds, where the real money sits and making that effectively providing that high capital that exists everywhere else and searching for avenues to invest, you can kind of access that pool. I think that’s the other kind of implication that people need to think about.

[17:02] Vikram Gollakota:

Thank you.

[17:05] Aditya Menon:

So one of the interesting areas is how actually tokenization can help to create a broader marketplace, right? So if you look at today from who wants to invest in various kinds of new kinds of assets. Tokenization is really important because it provides a super-efficient mechanism to get a broader base of investors, whether the bank, nonbank, asset managers, even the high net worth, family offices to actually invest in this asset class. And a lot of the work that we’ve done really revolves around how do you actually make this asset class more readily available? And how do you package all the credit data into the tokens so that people can make a credit decision?

[17:49] Vikram Gollakota:

Chuck, all this is great. I mean, sounds very nice, interesting. And everybody should be doing it, I guess. Right. But tell us with footfalls. What do we have to watch out for? What do our fans have for?

[18:02] Chuck Schultz:

Certainly, if we take this back down to the basics. As we mentioned before, there are different benefits to doing factoring securitizations, different types of financing. With the securitization, if you’re not able to forecast very well, your rate of advance could go down in the future, you could have difficulty selling. So it’s always price versus risk. Factoring is the same thing. Usually, they’re going to require a set amount being sold over a period of time. If you have a down month and receivables you may end up paying additional because you don’t have the receivables to sell that were anticipated when you had an agreement with a company.

You also may sit there and with recourse, you may be paying back to the financing source, whatever is not being collected. So you sold a receivable that in fact is a bad receivable. Many times they only want good receivables. So if it ends up failing, you’re going to have to compensate them for it in some fashion. So typically the biggest risk and pitfall is that you’re going to pay more money than you’re anticipating. So you really need to look at your financing source, who your partner is, what the agreement is, and how well they work with you, depending on the situation. So can you compensate them through additional payments? Can you compensate them through additional receivables? How do you really need to make sure the agreement is who you’re working with?

[19:31] Abhijit Prasad:

Chuck, it sounds like a lot of work is involved. So, how easy is it to set this up, Ravi?

[19:38] Ravi Akula:

It depends again like as I mentioned earlier, it depends on the creditworthiness of the customer. So every customer could be a buyer, a buyer as a seller also. That means as a buyer, suppose you have good creditworthiness, you can actually give the benefit back to the suppliers, the same time suppose you are a supplier yourself, your creditworthiness is good, then you actually get your own funding at a cheaper cost. So I won’t look at it as a pitfall in this one because I would say there are challenges in the sense, the clients need to be aware of their creditworthiness, how they actually keep up with their credit rating. I’m sure not all companies are rated by agencies. But still, when you go to a bank or even to a financing company, they are going to analyze your balance sheet, right? That’s the most critical thing because, if anybody puts the money on the table there, it looks at the risk aspect, right? So that is the most important challenge. Better risk, cheaper funding.

[20:52] Vikram Gollakota:

When banks are already having the receivables, payables and all the deposits, how are you differentiating yourself from banks?

[21:01] Abhijit Prasad:

Yeah, maybe I’ll add a comment that I think in terms of putting this together, especially on the receivable side of things, it’s different kind of view financing on the payable side versus receivable side. Data is a very key element that drives how easy is it to set up a program. And if you’ve got access to data as to how historically your book has performed, that makes it very easy for the financier to put a solution together if you don’t have data to prove that. And for example, if you use a platform that aggregates all your receivables management, all the data exists there. So it’s easy for a financier to put a financing solution against that. To your question, and I think I made a reference to that when I was saying, again, having worked for large banks for many, many years, and now I’m kind of for the FinTech. Receivables, payables have been a market that has been dominated primarily by banks and banks have been selling these assets in a small amount amongst each other. Actually these are great assets because receivables payables, a fantastic performance, if you look at the historical performance of receivables or payables, in comparison to bonds or CP, which is out there in the market, their risk performance and how they payout and in times of stress is actually significantly better. And therefore, there is a huge industry of real money investors, asset managers, funds who are actually looking to invest in this asset class. And the way we differentiate ourselves as a FinTech is we and we call it democratizing capital basically is making this asset class which is a great asset class available for a huge swath of real money investors, funds and even you know, high net worth individuals. In fact, individuals can invest through funds to purchase these assets. That makes it for a client, a completely new liquidity port that they did not have access to so you’ve got your existing bank pool of credit. This is completely different than over and above.

[23:10] Vikram Gollakota:

So they can coexist.

[23:12] Abhijit Prasad:

Absolutely.

[23:13] Vikram Gollakota:

Great. Great. So one question, I know there’s one minute left so I’m going to ask one simple question and the topic is unbilled receivables. So help me understand what that means. Because for me receivables are only after you bill. So what are unbilled receivables, Chuck? The rapid-fire question again.

[23:35] Chuck Schultz:

So the challenge with unbilled receivables, many factoring companies outside the FinTech, they have a difficult time taking on some of those types of receivables if there’s no history, so it really depends on the asset, the quality of the receivables and what they’re willing to take on.

[23:54] Abhijit Prasad:

I mean unbilled, just to clarify what we mean by unbilled receivables, it’s receivables which your accountant allows you to recognize on your balance sheet because a service has been performed already. So if you’re kind of talking about hosted software services, where you pay on a regular basis, let’s take HighRadius as an example. Let’s say we’ve covered the first two months of the year, services have effectively been performed for the first two months. Receivables for the first two months or the other kind of money due for the first two months can be recognized as a receivable. It may not have been billed because the billing may happen on a quarterly basis or a half-yearly basis. And we see this is no different from any other receivable. And you’re right, Chuck, that lots of companies struggle with that. But as long as you can explain the historical performance of how these receivables perform, you can actually finance them really well.

[24:51] Chuck Schultz:

It also depends on the type of agreement you have. So if it’s a subscription going out into the future, there’s no guarantee that the subscription will finally payout in the end. That’s where a challenge can be part of it. So as their services have already been performed, they can actually be factored much easier. But when you start looking at future services that have not yet been performed, and none build, those are going to be much more of a challenge if you’re looking to collect early on that.

[25:20] Vikram Gollakota:

Ravi?

[25:22] Ravi Akula:

Okay, I need to speak from a banker’s perspective. In a normal financing scenario, you need to have the fundamental document, which is the e-invoice, right? Whether it’s an invoice or a normal e-invoice. So it’s hard to actually recognize an unbilled invoice. So there could be options where probably, you could actually recognize a purchase order, which could be financed as well. So in the time, you are actually able to come up with an authenticated invoice. Probably that could vary. From a banker’s perspective, it’s not that easy to actually recognize an unbilled invoice.

[26:00] Vikram Gollakota:

One last question, Aditya and then we’ll close this. There’s a lot of conversation around various use cases, how easy is it to implement this from a technology standpoint?

[26:15] Aditya Menon:

I think that if you look at the most successful Supply Chain Finance programs, first of all, you need a big market maker to make a push, right. So, for the most part, going to be at least the big programs, which are run like my City, which, as a production buyer program, 70,000 suppliers around the world are really pushed through anchor bias, right. And so that gives more market momentum in order to get buy-in. However, I would say that the caveat is today’s adoption for large corporates is about 11%. Globally, right, in terms of what they do. So there’s a huge challenge in terms of how do you get the other 89% to adopt and a lot of that could be interest rate-driven simply because tier ones today have easy access to cash, they don’t need it. So that’s the first hurdle.

[27:07] Aditya Menon:

And the second one is basically, fatigue, you got a tier-one supplier, he’s getting bombarded with like five or six different programs from three different banks and one nonbank. At some point, the Treasury guy said, “You know, I throw my hands up, you know, what do I do?” So how do you actually end up with a bank neutral platform for corporates where they can cherry-pick what they need to do. And I think that’s the need of the hour today. So in a lot of ways, what HighRadius has done is to create the ability for that network, which Ravi was talking about earlier, which then allows you to cherry-pick who they want to finance rather than being thrust with different Treasury platforms from each institution. So banks do what they need to, which is provide the funding for the ecosystem partners such as HighRadius or Tradeshift, or GREENSIL, so you know, provide that ecosystem support that you need to bring, either different kinds of funders together with the procure to pay angle together, the order to cash cycle together. And that really creates a new proposition for tomorrow.

[28:05] Vikram Gollakota:

Thank you.

[28:06] Ravi Akula:

Can I add one little point here? Because this is very important. Yeah. So I think what Aditya mentioned is very, very relevant here. So the question is about how intensive is it the implementation, right? So with a practical standpoint, I already mentioned that look, the old school of bilateral deals, the implementation takes a lot of time. But now with the emergence of all these FinTech companies like HighRadius, I don’t want to use other FinTech names because I’m in touch with a lot of them. I would like to be fair to you. So this is actually creating a beautiful ecosystem for banks like us, where we can actually provide a financing layer, understand, which Abhijit also mentioned that we are all sources of funding, which is why there’s an ecosystem as you agree, they can coexist. But what is happening was with the emergence of a platform like HighRadius there is a beautiful role, technology can play in the implementation. Now, I would add one more point here. If you look at Europe, they have a platform called PayPal that is missing in the US or North America, where all these FinTech companies are connected to PayPal, which is actually sponsored by the banks. So that is needed here. In the sense, a buyer can be a client of your competitor, but the seller could be on your network. Today, they’re not networked. From a bank’s perspective again, I need to build 10 bridges with each company, even though it’s one-stop-shop. But that kind of scenario is needed. Something like petrol is needed in this one. That is a message I’m leaving here.

[29:46] Vikram Gollakota:

Thank you. Thank you, everyone. Thank you for being in the panel.

[29:53] Anchor:

Thank you, everyone, for joining us this morning. If you have any additional questions, feel free to stop by our demo booths down on the field or you can connect with any of the panelists on the app. And we have a bunch of great sessions lined up after this one. You can see the sessions and their locations here. If you have any questions, feel free to ask any of the AT&T staff to direct you. So thank you all again and enjoy the rest of your day.