How Your Suppliers Borrow Money: The Evolution of Relationship Lending and Business Networks

Suppliers can borrow money in multiple ways. From lines of credit to mezzanine funding, to convertible debt, the vehicles to access capital are complex and broad. Yet in just about all cases, the origination costs are quite high for different parties involved. As my colleague David Gustin observes in his recent paper “On-Demand, Event Triggered Finance With Network Models – A Game Changer?,” “sourcing deals, underwriting credits and approving/monitoring credits is time intensive and expensive.”

David suggests that this is where B2B networks can really begin to shine:
“B2B e-commerce networks (sometimes known as supplier networks or business networks) … can nearly eliminate the cost of origination and credit monitoring by tying the trade financing to an approved invoice at a transactional level between two parties in a B2B relationship … [they] create opportunities to finance the suppliers’ receivables (i.e., the implicit open terms trade loan made from supplier to buyer who created the receivables balance) that have entered the buyer’s system and are approved for payment. This approved invoice becomes a contractually buyer-signed loan that can then be subsequently sold (or ‘factored’) to a third party.”

Early manifestations of these approaches include the tight of invoice discounting models offered by Taulia (e.g., TED) and Tungsten, albeit both are still in the infancy stage of using their own capital or third-party capital to loan against payable obligations. Ariba tried for some years to build liquidity for its trade financing solutions with partnerships including The Receivables Exchange long before this area captured the attention of a broader set of providers (and specialists). No doubt others now see the opportunity as well.