Over the last several years, more businesses have migrated their sales models to online platforms like Amazon in pursuit of a broader, global customer base, with B2B sellers quickly following suit.
Now, as the pandemic continues to accelerate this digital shift, the small vendors on these marketplace platforms are discovering new challenges to the way they do business.
Among the biggest pain points for small- to medium-sized business (SMB) online sellers is a lack of access to affordable financing. Although digital marketplaces have democratized the opportunity to launch an online storefront — whether B2B or B2C — it has also left some of the smallest firms unable to secure funding thanks to a lack of a lengthy business track record.
And while alternative forms of financing step onto the market to help fill this gap, they come with their own pitfalls as well, according to George Brintalos, founder and CEO of Storfund.
“Over the last three to four years, there has been a disconnect between capital and eCommerce,” he said. “eCommerce has been here for a few years. But the capital for eCommerce is not there yet.”
In an interview with PYMNTS, Brintalos discussed the opportunity for invoice financing — also known as factoring — to adjust its own business model and fill in the financial needs of businesses selling online. Plus, he explained how this strategy can also open up invoice financing to tackle another key pain point of the online sales model: cross-border payments.
Direct To The Source
In traditional commerce, B2B transactions place a historically burdensome cash flow conundrum on small suppliers: It typically takes months for a vendor to be paid by its corporate customer.
In online commerce, whether B2B or B2C, this burden has shifted. Now, instead of waiting to be paid directly by the customer, businesses that sell via online marketplaces are instead forced to wait for payouts from the operators of such platforms, such as Amazon.
While invoice financing can be a valuable asset to connect vendors to those payments more quickly, Brintalos explained that traditional factoring workflows cannot seamlessly fit into the eCommerce equation.
“In traditional invoice discounting and receivables financing, verification of the receivables is the main risk and one of the big overhead costs of running this kind of business,” he said. “In simple terms, when I want to discount my invoice, I need to provide the physical invoice to the funder, who needs to verify the invoice. That verification process comes with some risk and overhead at the same time.”
The risk, he explained, stems from the fact that there may be errors or even fraud if a funder relies on the supplier to determine how much money the company is owed.
But through application program interface (API) integration, invoice financing solutions have the opportunity to integrate directly into that marketplace and verify an invoice from the source — a platform like Amazon — to mitigate that risk.
The Cross-Border Payments Opportunity
While access to funds is a key area of friction for small eCommerce sellers, it’s not the only challenge SMBs face as they migrate online. The opportunity to reach customers across borders widens significantly as a result of digital marketplaces, but this can create new challenges in terms of a company’s ability to receive funds in their local currency, and then use those funds to pay vendors in different jurisdictions.
Marketplace operators will often charge a seller a fee to convert earned sales into their preferred currency, as Brintalos explained. But invoice financing can sit within that payout workflow to connect businesses to funds without the traditionally high foreign exchange (FX) conversion cost.
By combining cross-border payments and receivables financing, businesses can be more strategic about their financing costs and ease the friction of operating within a global digital marketplace.
New friction points will emerge that will impact the flow of funds and working capital management, too. Between the proliferation of B2C, B2B and direct-to-consumer (D2C) online sales models, as well as new digital marketplace models from online food ordering sites to gig economy platforms to wholesale portals, the opportunity for invoice financing to accelerate payouts to SMBs within these ecosystems will expand.
The pandemic has accelerated the rise of eCommerce, said Brintalos, and through API integration, receivables financing can mitigate risk, accelerate underwriting and connect businesses to more affordable funds while they await payment from their marketplace operators.