Providing working capital against invoices

Anil Stocker

Co-Founder,
MarketInvoice Ltd.

MarketInvoice is an online marketplace that allows small and medium-sized companies to raise capital by auctioning their invoices to investors. To date, it has advanced £13m to more than 85 businesses, and it is growing quickly. In March 2012, it issued £3.5m, despite only having been set up in February 2011.

The firm's aim is to create a marketplace for what is traditionally a captive relationship between the factoring company and the client. "We wanted to make this process more price-transparent, competitive and flexible," says founder Anil Stocker.

Companies using the MarketInvoice platform choose the invoices they wish to auction, the term, the minimum advance they require, and the maximum fees they are willing to pay. Buyers then bid on invoices. Sellers pay a monthly discount fee of between 0.5% and 2.5% of the invoice face value.

MarketInvoice takes a fee of around 0.5% from both sides of the transaction but does not charge any arrangement fees, minimum service fees, late payment fees, funds fees or extension fees, and there is no contractual lock-in. Stocker believes that its total costs compare favorably with traditional factoring, which can involve a 25% to 35% effective interest rate when all costs are included.

There are other advantages as well. After companies have set up an account, they can raise working capital in just a few days or even hours — effectively the time it takes for an auction to complete. Companies are not locked in long-term contracts. Also, company directors do not need to provide personal guarantees, unlike with invoice discounting and factoring.

All this gives small businesses access to a new pool of funds. In turn, institutional investors can buy into a new asset class, with the potential for yields that compare very favorably with blue-chip corporate bonds.

Cash loans for online retailers

Rob Frohwein

Creator, Co-Founder
and CEO, Kabbage, Inc.

Kabbage is a specialist US provider of finance that targets online merchants who sell products or services via online channels, such as eBay, Amazon or Shopify. This is a sizeable niche: in the US alone, these businesses are estimated to generate revenue of more than US$60bn each year. Many of these companies are small, and so are off the radar of most banks, which typically focus on financing at least US$100,000 in working capital for retailers. But they still hold the same need for cash upfront to buy stock, run promotions and pay suppliers.

To fill this gap, Kabbage taps into information from various online marketplaces, payment intermediaries, social networks, and other service providers of its customers. It uses a fully automated system, pulling in data from an array of sites to assess potential customers. For an eBay seller, for example, it accesses data directly from the auction site, including all store and transaction information for the trader. It also gathers PayPal information for a better understanding of the firm's payments history. Beyond that, other data comes from social networks, such as Facebook and Twitter, which are often used by small businesses to maintain and build customer relationships. Overall, the company aims to get a holistic perspective of its clients' businesses, beyond simple credit ratings. "That really differentiates us," says Rob Frohwein, the firm's co-founder and CEO.

Since it started operating in 2011, Kabbage has gathered more than 20,000 accounts, most of which are repeat users. It currently provides more than US$3m of funding monthly but this figure is growing at around 30% every month. Operating in a category known as Merchant Cash Advance, which is similar to factoring, Kabbage can use its systems to anticipate how much cash flow will be generated in the following several months and then provides money against this. Charges range from 2% to 18% of the amount advanced, depending on various criteria, including how long the cash is needed for—typically one to six months.

Speed is another attraction. It is feasible for merchants to land on the site and have cash in their accounts within just seven minutes. "There's no other financial institution that can come close to claiming that," says Frohwein. Nevertheless, as the company scales, it is likely to partner with other banks and financial providers to share its technology and in turn expand what it is able to offer.

Providing an asset class to invest in microfinance institutions

Maria Teresa Zappia

Chief Investment Officer,
BlueOrchard Finance S.A.

Since its launch in 2001, BlueOrchard Finance has carved out a specific niche in the world of microfinance. It acts as an intermediary between traditional financial investors seeking alternative (and socially beneficial) investments, and the hundreds of microfinance institutions (MFIs) globally that provide loans to micro-entrepreneurs in emerging markets. BlueOrchard Finance aims not only to provide a new asset class for sophisticated investors, but also to boost access to finance for underserved entrepreneurs in emerging markets. Indeed, the typical profile of a microfinance borrower is an entrepreneur with a very small business who is seeking working capital, from as little as US$70 in India, through to a few thousand euros in Eastern Europe.

Its funds offer varying rates of return, and typically low risk, given that MFI defaults are low—and prior to 2009, were actually non-existent in BlueOrchard Finance's portfolio. The firm now has some US$700m of assets under management, invested into over 130 MFIs. Indeed, given the diversity of MFIs, which range from NGOs, right though to mainstream microfinance and downscaling banks, BlueOrchard Finance's key appeal has been in its financial innovation. Its various products and funds appeal to different investors, from open-ended fixed income funds with monthly liquidity, through to structured products and close-end funds with different type of public and private investors depending on the risk return profile of the product tranches. It has even created a structured product tranche that has been independently rated, further raising its appeal to mainstream commercial investors. "We've been at the cutting edge of innovative finance," says Maria Teresa Zappia, the firm's chief investment officer.

But as the global microfinance industry evolves, BlueOrchard Finance is under pressure to keep innovating. At one level, some MFIs are evolving to help support the evolution of micro-entrepreneurs into micro-enterprises and SMEs. Others are diversifying, providing finance for anything from home renovation, to education, and energy efficiency loans. At a wider level, microfinance has been a victim of its own success: "Now the challenge is how to support MFIs in doing something different, while keeping private investors interested in this sphere and satisfied with the social impact achieved," says Zappia. Looking ahead, the company aims to explore new ways to converge interest in so-called impact investing with that of the microfinance world.