The contagion effect, COVID-19 and bill financing

Before the world stopped fighting the unseen global outbreak of COVID-19, a number of source-to-pay (S2P) platforms were trying to crack the code on developing debt finance beyond Buyer approved invoices contained on their platform.

The idea went something like this. “Let’s target the suppliers of major buyers on our platform. With the extraction capabilities, we can extract information from the supplier’s accounting system and other sources. We can develop underwriting guidelines, possibly using a third party, and begin providing some form of debt financing beyond vendor invoices on our platform. We may even incur a first loss on any financing of the transaction, so that a potential provider of financial services and / or financing would be attracted knowing that we have the first loss.

Essentially, the S2P platforms wanted to go beyond their own closed-loop system and expand their debt financing offering to include, potentially, when invoices are submitted and when invoices have been verified, but before they are have not been approved for payment. In either approach, the risks are much greater than the buyer’s approved invoice technique.

  1. The invoices submitted present the highest risk. For example, a fraudulent invoice may be created or errors may be made i.e. double billing etc. (See: Why fraud scares investors who buy invoices)
  2. Verified invoices, which basically means the buyer confirms they have received the invoice, can suffer from dilution – that is, when a deduction is made from the value of the invoice for a number of reasons. In fact, when factoring organizations lose money, it’s usually not because Sears or Kmart goes bankrupt (they may in fact have credit insurance for this event, or they have long sensed this and have ceased to finance these bills), it is because of the dilution.

Although there are a lot of innovations around this space and new players have entered, such as Raistone capital, Provide, Tradeshift and others, the risks involved are highlighted in the black swan event we are currently experiencing due to the disruption of the coronavirus.

No one knows how long the devastation of business will affect multiple industries. Underwriting models probably can’t take into account what happens to a supplier when shortages develop or their line of credit runs out and they can’t fulfill orders or have a major packaging issue. This could turn into short deliveries, late deliveries, etc. and cause a contagion problem throughout the company. Customer service begins to deteriorate and tough choices have to be made. This kind of problem could get out of hand.

And just when we think we have flattened the COVID-19 curve, COVID-20 is appearing in winter.

The point is, providing debt finance as a tech company is risky precisely because the potential outcomes are overwhelming and cannot be predicted, no matter how good the underwriting is. We risk being fools of forecasting built on historical cash flow expectations, modeling and simulations, machine learning, etc.

Without government support, attempting to extend such large-scale loans could be very dangerous for a tech company. EXIM recently rolled out a government guarantee on supply chain finance to help this market, especially for lower quality companies. The reality is simply because you have data from an S2P platform or market network, that you can see historical trades, believe that you can limit and manage the risk, that is precisely when the effects contagion may appear.

David Gustin leads Global Business Intelligence, a research and advisory practice focused on the intersection of payments, trade finance, trade credit and working capital. He can be contacted at dgustin (at)

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