Amid coronavirus pandemic, B2B invoice exchange beefs up financing
As governments rush to provide financial lifelines to small and midsize enterprises, fintechs such as Crowdz offering automated B2B lending, credit scoring and invoicing platforms are playing a new role.
Obtaining rapid financing is critical for businesses to stave off bankruptcy, as many newer SMEs have only enough cash on hand for 10 days. Smaller businesses have struggled to obtain loans from banks because of lack of data about their cashflow and creditworthiness. B2B lenders, which have access to information about SME borrowers’ cashflow such as their invoices, can act as channels for disbursing government-backed loans from banks.
The U.S. Senate coronavirus bill provides scope for approved fintechs to disburse government-backed loans to SMEs, while Brazil’s National Monetary Council has authorized digital lenders to lend funds from federal development bank BNDES to SMEs. Canada’s banks have announced automated loan application and disbursement processes for SMEs to receive C$25 billion in government-backed loans, while the Canadian Lenders Association, representing non-bank credit providers, has called on the Canadian government to allow fintech B2B lenders to disburse these funds to SMEs.
"Right now we’re focusing on providing small businesses affected by the COVID-19 economy with an alternative financing solution,” said Payson Johnston, CEO of U.S.-based Crowdz, which is backed by Barclays. “We want to help SMEs survive and see us as an additional resource to U.S. Government Small Business Administration (SBA) funding options.”
Prior to founding Crowdz in 2014, Johnstone was a global B2B supply chain senior manager at IT network vendor Cisco for 18 years.
Crowdz worked with Barclays to develop its Ethereum-based InvoiceXchange, a global 24/7 invoice platform connecting businesses and their customers digitally. InvoiceXchange enables sellers to automatically digitize invoices, which they send through the platform to customers instead of emailing PDFs, and automatically reconcile orders, invoices and payments. Using InvoiceXchange’s payments gateway, which it developed with Barclays, customers can pay suppliers via ACH, Swift, e-checks, credit or debit cards, and virtual cards.
“Three types of companies use our platform,” said Johnston. “The first are SMEs or large companies who issue invoices. The second is funders who buy these invoices, and the third is enterprise buyers who roll out our solution to their supply chain. Our system allows for buyer enterprises to say: 'We want net 90 or net 120 days for this invoice.’ Instead of offering the buyer an early payment discount, the seller can sell its invoice at the risk level and rating of the buyer enterprise and receive its cash a lot faster.”
Sellers raise financing using InvoiceXchange’s invoice auction function, uploading their invoices for bank financing and providing information about their business. Crowdz uses external data plus its own internal smart score to credit-rate loan applications and calculate risk scores on every buyer and seller that uses its platform.
“We’ve developed a risk score that looks at credit risk plus operational and supply chain risk. Invoice funders can review the risk score both for the supplier and its customer," Johnston said.
In February 2020, Crowdz launched a pilot of InvoiceXchange in preparation for going live in mid-2020. Small firms use the platform for free, while medium-sized businesses pay $9.99 a month and enterprise users negotiate with Crowdz for their fee. Crowdz’s goal is to generate revenues by selling credit data to lenders to make better-informed financing decisions.
“While other B2B platforms also digitize and auction invoices, what is new about Crowdz is that it pushes this into the SME space,” said Enrico Camerinelli, Aite Group senior analyst. “It uses transactional data to build an SME’s credit history. SMEs aren’t normally part of traditional supply chain finance programs, because they may not be strategic suppliers to the big buyers. Everyone in supply chain finance is currently looking at the issue of: ‘If I lend money to a company, how do I make sure that I get the money back if they go bankrupt?’”
Crowdz uses banks to move funds between buyers and suppliers and funders and sellers. “Over time, we’ll be working more closely with Barclays on the payments side of our platform including a Barclays-developed virtual card,” said Johnston.
Blockchain technology makes it easier to record and verify transactions on a distributed ledger, and to compile data such as invoices and payment transactions which can be used by funders to assess loan applicants’ creditworthiness.
“Crowdz uses Ethereum to ensure invoices and payments are closely tied together,” said Johnston. “The blockchain allows us to move documents and value together on the blockchain underneath a smart contract. We can offer a layer of security and auditability on transactions including KYC, AML, tamper-proof documentation of all transactions, and title ownership of invoices. This prevents fraudulent loan applications where companies finance the same invoice from multiple banks.”
U.S.-based enterprise software vendor Oracle selected Crowdz as one of 20 participants for its Oracle for Start-ups program, which will give Crowdz support to expand and monetize its platform. “We’ll be sending blockchain-based invoices from our Ethereum blockchain to Oracle’s blockchain to test our interoperability with other enterprise blockchain platforms,” said Johnston.
Crowdz participated in Barclays’ 2018 Accelerator program in London, following which Barclaycard provided funding and support, including integration with its payments gateway, for a proof-of-concept for InvoiceXchange.
In May 2019, Crowdz received $5.5 million in a Series A funding round led by Barclays and Bold Capital Partners. Following the investment, Maria Parpou, chief product officer at Barclaycard, joined Crowdz’s board.
Demonstrating Barclays’ interest in supply chain finance, in January 2019 Barclays and Santander InnoVentures led a £26 million Series B funding round in U.K-based invoice financing platform MarketInvoice, now called MarketFinance.
“We’re interested in Crowdz’s B2B payments platform because, while we believe the B2C space is digitizing very rapidly, there’s still a lot of potential to start that journey for B2B,” Nick Kerigan, managing director, future payments in Barclays’ Cards and Payments division, wrote in a blog post. “The team at Crowdz impressed us with their knowledge of the space and of what they’re trying to solve. We brought them into the Accelerator, sponsored them through, did a proof-of-concept with a Barclays supplier, and the Barclays Group Innovation Office was a lead investor in Crowdz’s Series A round. Now Crowdz can explore other opportunities within Barclays to grow its business faster.”
Other blockchain-based fintechs graduating from Barclays’ Accelerator programs include Capexmove, a platform which drafts and digitizes debt financing documents as smart contracts, and Synswap, a blockchain solution for capital markets.