Taking Trade Finance to SMEs

trade finance SMEs

The financial crisis of 2008 led to many developments in fintech generally and alternative lending specifically. We’ve heard many of those stories before. One of the problems the crisis revealed is the restriction of capital, particularly among international small- to medium-sized enterprises (SMEs). Another problem was the massive proliferation of mobile coupled with the “digital […]

trade finance SMEs

The financial crisis of 2008 led to many developments in fintech generally and alternative lending specifically. We’ve heard many of those stories before. One of the problems the crisis revealed is the restriction of capital, particularly among international small- to medium-sized enterprises (SMEs). Another problem was the massive proliferation of mobile coupled with the “digital self” that allowed lenders to identify the types of businesses people engaged with. Digital data became a game changer for a lot of companies employing new technologies. One company got the bright idea to solve both of these problems with a single solution aimed at SMEs making their first entrance into the online ecoystem.

Who Are Kountable, And Why Do They Count?

Kountable saw its genesis in 2013 with CEO and Co-founder Chris Hale getting together with co-founders Craig Allen and Kathy Numera.

“We looked at trade finance in a different way,” Hale said, adding that one of his co-founders spent 30 years doing trade financing at the institutional level. Typically being an instrument extended by banks, Kountable puts the emphasis on the finance rather than the trade part of the equation. The financial crisis, Basel III, and other regulations that followed handcuffed banks in their ability to extend capital to SMEs. Kountable stepped in to fill the void.

By using a cloud-based platform for the import and export of goods, Kountable gives SMEs access to trade. By outsourcing third-party logistics and bringing curated transactions so deals get institutional level treatment, the company helps SMEs sidestep problems they would typically have accessing top tier products.

Currency management is one area that requires Kountable’s due diligence. As they buy in one currency and deal in another, there are commercial terms, such as paying suppliers, during negotiations.

The company is successful when it simplifies the translation between big and small. Hale said, in most trade finance deals, you have big-to-big (that is, enterprise-level business trading with enterprise-level business). For example, Cisco might sell a network bridge to a multinational corporation. But when you have a small business involved (Cisco selling to a bank in East Africa, for instance), Kountable ensures that everyone gets the same retail treatment. By bringing users together in a mobile app on a cloud-based system, the company makes it seem institutional to both parties.

“The asset is a trade receivable,” Hale said. For example, an alternative credit fund that extends a $150M line of credit. “We align ourselves with the success of the transaction by pricing our service like a margin-sharing arrangement.” The four-step process includes:

  1. Kountable collects directly from the end customer
  2. The bank buys new servers from Cisco
  3. The reseller negotiates the margin for the procurement process, importation, and installing services
  4. Kountable takes a portion of the margin for the trade services it provides.

The Three Components of the Technology

The technology includes three key components:

  1. Identity management—The small business reseller downloads a mobile app and shares his or her data with Kountable. That includes social media, business registration, and personal info about the owners and shareholders. Kountable builds a “robust profile” on the SME and runs Know Your Customer (KYC) and Anti-Money Laundering (AML) processes for validation. The company also looks at supply, and, if it’s a private business, customs. The company looks at trade as a network. The more transactions they do, the more the network effect creates a safe environment for more transactions.
  2. Cloud-Based Control Management System—This digitally manages assets on the operating side and the financial side of a trade transaction. Hale said it’s tricky because there’s not a lot of financial data inside the transaction. Most of the info is operational. That is, goods are paid for and shipped–in transit, through customs, etc. Traditional financial institutions aren’t set up for this. This system manages the operations and payment of this trade asset. The reason it’s important to have collaboration taking place between the reseller and the in-country partners (who help with the documentation of the banking relationships, clearing customs, and more) through the mobile app with the Kountable team in San Francisco is that they all plug in to make sure transactions go smoothly. These two elements combine to create a financial asset.
  3. Trade Accounting Service—The investor who extended the $150M line of credit (LOC) is consuming trade receivables as collateral. The trade accounting service will be able to report on the synthesis of the financial and operating information in order to report the portfolio value to the investor.

Not being a formal venture fund, Kountable is a “traditional single family office with a portfolio of private companies with double bottom lines.” The company has raised $15M, 85% of which came from the family office with capital added from other investors. These are for-profit companies, of course, but the business focus is on the “larger good.” The concessionary returns the company receives by leaving some of the money on the table to make a significant impact is a part of the reward.

Kountable Key Differentiator and KPIs

“Our committed focus is to the SME,” Hale said. This led the company to build a network of enterprise-level participants and a technology platform to cater to that user. “Most other trade platforms focus on digitization of a two-party trade,” but it’s all “enterprise to enterprise.” Kountable was created to help the global SME population. “That focus on the SME as the user has created an ecosystem unlike any other platform I’m aware of.”

Kountable has about 5,000 SMEs registered and moves $3 million per month in trade transactions. That’s in two countries–Kenya and Rwanda. Interest from 40 other countries has led to building a platform to address the market demand.

“We have a line of sight to profitability just by working within these two markets,” Hale said. “[We’re] building
global expansion to go outside of the family office this year.”

SMEs in Kountable’s two markets buy goods from the U.S. and work with U.S. supplies to sell to customers in East Africa products they wouldn’t have access to otherwise. In the year ahead, Kountable plans to work with U.S. SMEs on similar transactions.

Kountable’s Competition and the Future of Trade Finance

Kountable’s competition consists of large procurement companies, groups like Tradeshift, and financial relationship companies. On the other side, there are e-commerce platforms, like Amazon, that are more consumer focused.

“There really isn’t a competitor that fits together a solution targeting our market specifically,” Hale said. The competition is mostly peripheral.

Hale believes the future is going to see trade financing dramatically influenced by digitization across the board. “The players are focused on enterprise-level digitization, where invoicing becomes an Application Programming Interface (API) and customs brokerage becomes digitized. As that continues, the nature of trade financing will evolve toward a a focus on operations.” He sees this evolution ultimately leading to the incorporation of the blockchain. “The elements of smart contracts and the distributed ledger are very well suited to the network approach to trade facilitation.”

Kountable’s near-term plans are to continue demonstrating the universality of its solution. Hale said they have significant demands in many regions of the world, including the U.S., and the goal is to plant some flags in some specific markets. Along with the U.S., he mentioned Southeast Asia and Latin America as potential growth regions. “There are many elements of our transactions that are replicable across different verticals and different regions,” he said.

Conclusion

The company is looking to internalize its engineering team and build its other respective teams. They have a number of product launches in the next quarter and a half including a redesign of the mobile app. Beyond that, Kountable is focused on growth capital for market expansion, enterprise sales, and putting in place the legal and financial structures needed to move into Southeast Asia markets like Vietnam, Thailand, and Malaysia.

By focusing on the double-bottom line, Kountable not only has a bright future in the spaces of trade and trade financing, but the company is also doing its part to improve the quality of life in areas of the world where goods, services, and technology would be otherwise less accessible. And while it isn’t evident if the company will ultimately succeed, it’s certainly evident that it should.

Authors:

Written with Paul Keenan.

Allen Taylor

Creating a New Market for Invoice Financing

invoice financing

We see so many great businesses failing to take off because they are unable to get funding from legacy financial institutions and high-interest rates charged by alternative lenders deter them from seeking credit. Their growth is perennially hampered by slow paying customers, which leads to cash flow issues. Realizing that there is a funding gap […]

invoice financing

We see so many great businesses failing to take off because they are unable to get funding from legacy financial institutions and high-interest rates charged by alternative lenders deter them from seeking credit. Their growth is perennially hampered by slow paying customers, which leads to cash flow issues. Realizing that there is a funding gap for startups and growing companies, Gabriella Krista Morgan, with her father Bruce Morgan, launched P2Binvestor, a crowdfunded receivables finance company operating an investment platform for small- and mid-sized businesses.

P2Binvestor was founded in 2012. Its headquarters is in Denver, Colorado. The firm has raised over $16 million in various funding rounds with Rockies Venture Club taking the lead in Series A. Though the company was launched in 2012, it took two years of groundwork (raise money, infrastructure, legal framework, etc.) to bring the platform to market. CEO and Co-Founder Gabriella Krista Morgan has a degree in economics and political science from McGill University. Prior to founding P2Pinvestor, she was accounts director at SapientNitro.

P2Binvestor’s Business Model

P2Binvestor provides lines of credit (LOC) from $250,000 to $10 million backed by the borrower’s receivables and inventory. Companies that are growing quickly but do not qualify for funding from banks because they do not have several years of operating history and cannot afford high-interest rates charged by online lenders is the target market.

The platform follows an asset-based lending model and has also developed in-house technology to facilitate management of LOCs. Traditionally, managing LOCs has been the Achilles heel for both lenders as well as borrowers. Therefore, P2Binvestors was focused on building a modern borrowing experience and a sophisticated technology that is capable of early detection of problems in underlying invoices. Through constant monitoring, it is able to resolve problems before they snowball into defaults.

It has extensively used machine learning to identify patterns in data and has used its own data for developing an algorithm focused on loan performance rather than upfront underwriting. That means financing offered by P2Binvestor is quite different from the traditional term loan. Since P2Binvestor is constantly lending, its underwriting process is constantly developing and thus minimizing the default risk.

A customer can borrow ranging from $250,000-$10 million, or depending on the value of their invoices. But on average, the firm lends around $1 million on average. Based on outstanding balances, the borrower pays daily interest and APR ranges from 15%-19%. The customer only pays for the amount used and not on the total LOC limit.

Bank Lending Program

The company has also launched a Bank Lending Program. Under this program, it partners with banks to lend to companies that have growth potential. Launched in 2017, the company has found its first partner, New Resource Bank. The bank will provide P2Binvestor’s products using P2Binvestor’s technology. The loans will also be managed by P2Binvestor; the rate of interest ranges from 8%-12%. It’s a 50-50 partnership meaning 50% of the funding is provided by the bank and another half by the P2Binvestor marketplace. Since bank’s funding is cheaper, rates are substantially lower than typical marketplace lending rates.

This program is unique as no one offers such a program. It is particularly beneficial for companies that are growing at a neck-breaking pace. By providing quick funding at bank rates, P2Binvestor is helping to lower the cost of capital for its target market while expediting growth. The lending ratio is 50% to product-oriented companies and 50% to service companies. It typically lends to consumer product companies (mostly new brands), media companies, staffing companies, light manufacturing, and distribution companies. Most of the companies it lends to have consistent payroll and inconsistent payers.

Flexible Lending Practices

Unlike other lenders in the market, the P2Binvestor lending model is fairly flexible. That means the customer can borrow as per their needs and any time they want. Loans are not fixed in nature–for instance, $1 million for three years–rather, they are dependent on the borrower’s invoices. This model does not let the company overstretch, thus ensuring responsible lending.

P2Pinvestor has issued loans in excess of $125 million in LOC in the last three years. Its collection rate is quite high (80% collected) and its default rate is under 2% for the entire portfolio. Having its own in-house collection team does help. It garnered $6.5 million in revenues last year and expects to reach $11 million by the end of this year.

Though there are plenty of alternative lenders, there are not many lenders dealing in a ticket size north of $1 million. Having said that, P2Binvestor’s biggest competition is traditional asset-based lenders. Though there are more than a thousand lenders in the space, the firm’s cutting-edge technology and focused customer service gives them an edge over rivals.

A hybrid lender that syndicates 80% of its portfolio off the balance sheet, P2Binvestor is more of a “deal marketplace” where institutional investors can buy into deals in which they are interested. P2Pinvestor then uses its own balance sheet to fill funding gaps.

Diversity is the Path to Future Lending

The company will look to enter into further partnerships with banks. Traditionally, banks have not been big on invoice financing, but P2Binvestor believes technology will help banks to get comfortable with this new financing vertical. Its long-term goal is to provide a complete set of lending products to its target market.

The CEO wholeheartedly believes in diversity, and that is the reason why 50% of the company’s workforce is female. It is trying to bring a new wave to the corporate world where women get an equal shot at leadership roles. It is just the beginning, but the company is fully committed to its diversity program.

In a short span of time, P2Binvestor has become a leader in its segment. It has constantly stretched the boundaries with technology, innovation, and culture, and that is the reason it is expected to continue redefining lending norms. With groundwork already laid for future expansion, P2Binvestor will be looking to dominate big-ticket alternative lending.

Author:

Written by Heena Dhir.

8 Key Reasons Small Businesses Are Denied Loans

life insurance sba loans

There’s no doubt about it: growing a small business is no small challenge. No matter how amazing your idea or product, you’re bound to encounter some serious mountains. According to a TD bank 2017 Business Survey, some of the key challenges that small US-based businesses face today are rising interest rates and rising healthcare costs, both […]

life insurance sba loans

There’s no doubt about it: growing a small business is no small challenge. No matter how amazing your idea or product, you’re bound to encounter some serious mountains.

According to a TD bank 2017 Business Survey, some of the key challenges that small US-based businesses face today are rising interest rates and rising healthcare costs, both of which can be at least partly attributed to uncertainty surrounding the state of political leadership.

And these days, more and more small businesses like startups are turning to credit cards and other forms of financing over bank loans than ever before. This is partly because some one in four businesses applying for credit were denied, and the ones who received financing did not get as much as they needed.

According to the Federal Reserve Bank of New York:

“… although many employer small businesses were profitable and optimistic, a significant majority faced financial challenges, experienced funding gaps and relied on personal finances. These issues were even more pronounced for the smallest firms, which were less likely to receive necessary funding and more likely to rely on personal finances to operate.”

Despite the fact that the vast majority of businesses in the United States are classified as small businesses – that is, they have employee bases of 500 or less – approximately half of all businesses fail in the first 5 years.

Many of these fail due to lack of funds and a lack of finances.

On top of that, even the businesses that succeed don’t even break even for 2 or 3 years, making financing at the outset crucial. The tricky part is that securing financing is also the most difficult part, which is why so many small businesses are denied financing. And owners are understandably frustrated.

Here are a few key reasons why small businesses are often denied funding.

An Uncertain Economic Climate

Uncertainty behind the local and regional economy is a basic stressor and reason behind the struggle many small businesses encounter. This very uncertainty is why so many businesses are likely to seek financing.

Unfortunately, this problem is also a reason why banks are less likely to give loans. When times are tight, lending is too. Banks aren’t inclined to lend when it’s possible the economy will take a dive, tanking many small businesses.

Because of this, many people are turning to personal savings, lines of credit, and even loans from family and friends.

Lack of Collateral

Collateral is some type of asset which secures the loan. This collateral can be some type of equipment, real estate, or anything else a bank could repossess and sell if the business fails to repay the loan.

It’s crucial for small businesses to list collateral on loan applications for the obvious reason of showing that they can pay it back in the case of default. The problem is that most startups don’t have much collateral like vehicles or business equipment. The result is the small business is denied a loan.

Gender and/or Ethnic Bias

Unfortunately, there appears to still be a major gap here, even though lenders are not supposed to be biased in this way. In fact, loan approval rates are much higher for white males than they are for women and minorities.

According to gudcapital.com:

“… small businesses that were more than 50 percent owned by a woman only received 15 percent of all SBA 7(a) loan approvals; American Indian owned businesses received 1 percent; Asian owned businesses received 24 percent; African American owned businesses received 2 percent; Hispanic owned businesses received 6 percent; White owned businesses received 53 percent; and male owned businesses received 70 percent of all SBA 7(a) loan approvals.”

The sexism can be so bad that some female founder resort to extreme measures, like creating an imaginary male founder to dispel the bias.

Bad Credit History

If a business owner has a terrible credit score, there’s a really good chance they’ll be denied funding. No surprise here.

This is why it’s so important that business owners get to know their credit score before they apply for a loan. Additionally, they should focus on building a solid credit score from the get go, even if they think they won’t need a big loan.

Understanding your business credit score makes you more likely to be approved for a loan and more prepared to grow your business.

What many don’t realize is that if you’re a small business owner, you need to have both a strong personal and business credit score to secure a significant amount of financing from major banks. There’s no way around this.

According to nav.com, the ideal credit score is 680 to 720. It also helps if a business owner understands how to demonstrate a solid history of responsible money management.

If you your credit score is low, you’ll need to spend time improving it before applying for a loan.

High Operating Expenses and Slow Growth

If a business can’t adequately demonstrate growth and growth projections, they may have trouble securing adequate financing for further growth—another catch-22 situation.

According to a Small Business American Dream Gap Report, 3 of 10 small businesses face challenges covering operating expenses. This trend is often due to the challenges of incorporating new employees as well as expanding or building inventory. Unfortunately, if they can’t cover their expenses, they’ll have difficulty securing funding

According to Entrepreneur.com, some 26 % of business owners don’t hire or expand because they don’t have the funds to do so. In turn, they resort to personal savings or loans from friends and family, despite the significant risks and high interest rates involved in these actions.

Lack of Cash Flow

In the past year or so, about 45% of businesses sought out financing, namely to cover operating expenses and expansion. This need for funding indicates a severe need for extra cash flow, which can be a huge red flag to banks.

Cash flow is not only one of the main reasons that existing businesses fail, it’s also a top reason why financing applications get denied. The reason behind this is simple: expenses come first before loans. This makes sense if you think about it on a personal financing level as well: you’re going to pay your rent and bills before you pay your loan payments. It’s simply a matter of priority.

Type of Business

According to nav.com, business owners are more likely to be denied financing if they are sole proprietors, brand new businesses, or state-approved businesses. In addition, businesses are liable to be rejected based on the type of industry they’re in.

In this game, size matters, and unfortunately the very nature of most small businesses makes them a bigger risk, especially if they are new. According to the Federal Reserve Website, smaller firms are “notably less successful at obtaining financing at large banks (45% success) than larger firms … (72% success).”

Part of the way a bank assesses a loan application is by assessing the customer base. If they’re looking at an application from a business in an industry that has a stable customer base, they are more likely to approve the application. Showing diversity in your client base is a key way to show secure projections.

Unclear Understanding of the Financing Process or Options

According to nav.com, there are at least 44 of different options for small business financing in the U.S. Depending on your area and/or industry, there may even be specialized grant options that are not widely advertised. Entrepreneur.com reports that some 20% of businesses applying for loans in the past 5 years had experienced multiple rejections and a quarter of these did not have a clear reason for the denial.

Researching and applying for these can be extremely time-consuming, which is why it’s recommended that small businesses ask the local business association for tips pertaining to their specific situation and/or industry.

All this points to a serious lack of understanding and transparency around what makes a business credit worthy. If people simply aren’t aware from the get go, or they’re asking questions but not getting clear answers, there’s obviously a problem.

Conclusion

To better prepare for loan applications, small business entrepreneurs need to have a clear picture of their current status, both in terms of financing and in terms of future projections.

They need to understand the context of securing funding to build accurate projections, and they can then send these projections with the loan applications to hopefully create a positive feedback loop.

But beyond that, small business owners need to thoroughly demonstrate their financial responsibility in order to have the best chance of securing crucial funding.

When you have business self-awareness, you are much more likely to succeed and to get the financing you so desperately need.

This article originally appeared at Life Insurance for SBA Loans.

Author:

Written by Life Insurance for SBA Loans.

Quest for a Business Loan: Tips from an Underwriter

small business line of credit

Getting a small business loan is such an easy process nowadays if you have access to the Internet. In some cases, it’s just as effortless as shopping for a new pair of shoes on the Web. You can now go to a lender’s website, be approved, and get funded in a day, or even a […]

small business line of credit

Getting a small business loan is such an easy process nowadays if you have access to the Internet. In some cases, it’s just as effortless as shopping for a new pair of shoes on the Web.

You can now go to a lender’s website, be approved, and get funded in a day, or even a few hours.

But then again, getting a small business loan or a business line of credit online is not the same as buying a new pair of sneakers or loafers.

Technology has made many things quicker and easier. But when it comes to business financing, applying and getting approved takes time and preparation.

In most cases, it involves putting your best foot forward, as my colleague Stuart Blake pointed out in his blog post on how to get a business line of credit and the mistakes to avoid.

Here are some tips based on my ten years in the fintech industry, including six years experience in evaluating and approving small business financing applications:

1. Know your funding needs
These are the three basic questions you need to answer before applying for a business loan:

  1. Why do you need the money?
  2. How much do you need?
  3. What debt payments can you afford?

Whether you’re applying for financing through a bank or an online lender, knowing and understanding your funding needs is important. It can spell the difference between a business loan that would help your business grow and one that would weigh you down with unmanageable debt.

Let’s consider two restaurant owners with different business needs. The first needs to replace an oven that broke down while the second is looking to expand to a new location.

A new oven is a major expense, but the first restaurant owner makes a smart move by taking up a credit line with repayments that are well within their profit margins.

On the other hand, the second restaurant owner applies for a credit line with a high credit limit for a plan that was clearly over ambitious. To make payments on the credit line, the second restaurant owner’s new location would have to be up and running within two months. A very aggressive timeline.

It would also need to generate four times as much profit as their current location is making.

Most lenders will try to help you figure out if your plan makes sense. But you should have a clear and detailed sense of your business needs and finances even before applying for financing.

2. Know your legal standing
Having a clear idea of your legal standing as a business tells a would-be lender that you have a solid grasp of your business affairs. And this is fairly easy and quick to do.

For most business owners, it involves checking with the Secretary of State’s office in your area to see whether there are business liens or tax liens on you or your business. In most cases, you can do this online.

If there are liens that are not valid, you could take the necessary steps to have them removed.

In my career, I’ve encountered clients who were able to increase their credit lines by as much as $50,000 in under 48 hours just by removing a couple of old irrelevant liens from their business.

If your business is incorporated, this would also be a good opportunity to check if you are properly registered and in good standing with the Secretary of State. If your business isn’t incorporated, you should consider doing so before applying for financing.

Remember, lenders often view incorporated businesses as more stable and creditworthy.

3. Google yourself
Googling yourself is important for getting a business loan? Yep, that’s right.
Your online identity, including the information you have on your business website, and even the comments and complaints your customers post on review sites, could become critical factors in your quest for funding.

Many financing companies will check your company on the web as a way of gaining more insight into you and your business.

They’ll likely check your LinkedIn and other social media profiles. They’ll probably even read what customers say about your business on such sites as Yelp. Negative customer reviews could reflect poorly on your business. You could take steps to mitigate the impact of these reviews by responding to the comments.

It’s also smart to be aware of these comments and be prepared to explain the negative reviews in case they come up in the application process.

4. Check your credit
Your credit will, of course, be critical in your bid to get a loan or a business line of credit.

Most lenders will check your personal credit report in evaluating your loan application. While it is often overlooked, your business credit report is also important. It can have a big impact on your application, especially if your personal credit report isn’t stellar.

Checking your credit also gives you the opportunity to identify issues that you may be able to resolve easily, such as settling old debts or correcting false information.

5. Have your documents ready
If you’ve secured financing for your business in the past, you know a critical part of that process: you will be asked to provide documents. Sometimes lots of them.

This is also true with online business lenders. In fact, you may even be asked to provide additional documents as your application is being processed.

That’s why it’s important to make sure you have key documents ready and in digital form when you’re applying for a loan or a business line of credit. This would speed up the application process and prevent delays.

That was the experience of a consulting company in search of financing. The firm had just gone through a significant downturn, which could have led to the rejection of the company’s application. But the consulting company ended up being funded on the same day. The reason: the business owner had all the necessary documentation that painted a clear picture of the business. The documents showed that the downturn was the result of normal seasonality and that the business was about to bounce back.

Here’s a list of documents worth keeping handy when applying for a loan:

  • Recent bank statements (last 3 to 12 months)
  • Recent tax filings (1 to 3 years)
  • Incorporation papers
  • Updated balance sheet
  • Profit and loss report

6. Find the right lending partner
The quest for business financing is, in many ways, also a search for the right lender or financing partner. This is particularly important now that you have so many online financing options.

The right lender and credit line can build a business up, help them grow and achieve tremendous success. The wrong one could cripple a business with poor financing decisions.

What’s an ideal lending partner?

First off, the lender must have the type of financing you need. There are many choices, and picking a lender depends on what your business needs.

The ideal lender also must be transparent about how their products work and their financing terms, including interest rates and fees.

Author:

Written by Gil Rosenthal.

Gil Rosenthal is director of risk operations at BlueVine. A native of Israel, Gil comes from a family of small business owners who offer consulting services to other business owners. He has been in the FinTech industry for over a decade, including the past two years with BlueVine. He commutes to work 90 minutes in each way, but feels it is worth it since he’s helping small businesses create sustainable growth.