“Follow the money” is usually sound advice. But for alternative SME lenders, it’s more of a “follow where the money isn’t” mentality. That’s how invoice financing company Aztec Exchange, based in Ireland, found itself spreading into Spain and Latin America.
But there was more to this global expansion, explained COO Oliver Gabbay, than entering markets where small suppliers are struggling to access financing. He told PYMNTS about the regulatory and economic climates of Spain and LATAM that promote opportunity for the invoice financing world.
Late Payments
Suppliers everywhere struggle with late payments by their corporate buyers, whether due to insolvency or their clients’ own cash flow problems or because buyers use their market power to pay suppliers late in favor of their own cash flow management.
“It’s a struggle, absolutely,” Gabbay said of the late payments climate in Spain and Latin America, where Aztec Exchange has just introduced its early supplier payment tool, ePayMe (known elsewhere as PayMe, which launched earlier this year).
In Spain, he said, the problem is particularly bad. Research published by Atradius last April concluded that Spain continues to struggle with a high rate of insolvency, with the level of business bankruptcies expected to remain twice as high as it was before the financial crisis.
About 87 percent of Spanish businesses said they had experienced late payments by corporate buyers in the last year, with 41.8 percent of the total value of receivables being paid late (above the regional average across Western Europe).
Spain’s average days payable outstanding is higher than the rest of Western Europe, standing at 52 days. More than a fifth of Spanish companies expect this delay to worsen in the future.
Meanwhile, Atradius research conducted across the Americas found that maintaining sufficient cash flow levels is a top concern for Latin American businesses, while over a fifth in the region said collecting outstanding invoices is a major concern. Atradius’ research found that 38.4 percent of the total value of B2B invoices was unpaid by its dude date across the Americas, higher than the European average. Mexico seems to be plagued the worst, with the highest value of outstanding receivables being paid late and the highest percentage of invoices being paid 90 days past due in the Americas.
Indeed, late payments are at the crux of the invoice financing industry. Without late payments, suppliers wouldn’t need financing by these providers to access working capital while they need to get paid. But for Aztec Exchange and other alt-lenders in the market, late payments aren’t always a good thing for the company.
It’s part of the firm’s vetting process to understand its borrowers’ clients and to mitigate risk by assessing the quality of corporate buyers and their ability to (eventually) pay invoices. If someone doesn’t pay, it’s bad for the supplier, and it’s bad for the lender.
“For an SME, they have to take opportunities as they come,” Gabbay said. “Typically, they’ll have a mixed book of debts — some good payers, some will be those companies that struggle to pay and some are companies that have good credit quality but are slow to pay because they ultimately have negotiating power to effectively extend their own cash flows and increase working capital.”
The challenge in markets like Spain and Latin America is to analyze the buyers on suppliers’ books to determine whether they’ll actually pay or whether clients have gotten into business with the wrong people.
Regulatory Climate
In the U.S., alternative lenders are facing the threat of a regulatory clampdown. But Gabbay said he sees the opposite for markets like Western Europe and Latin America.
“South America, due to a lot of fiscal compliance requirements and government regulation, there is a high prevalence of usage with respect to electronic invoicing,” he said. “It’s mandatory in many countries.” Spain, too, has eInvoicing mandates as part of the European Commission’s SEPA initiative.
That mandate is helpful to invoice financing companies like Aztec Exchange that depend on eInvoices to seek potential customers, collect data and provide financing (Aztec Exchange’s expansions into Spain and Latin America are facilitated by its partnerships with electronic document company SERES in Spain and eInvoicing firm Gosocket in Chile).
“Regulation has very much been pushing more towards fiscal compliance in the use of electronic invoicing to become increasingly prevalent, and that really helps our cause,” the COO explained, adding that there may be an opportunity for governments in these places to introduce regulations for factoring and supplier finance in particular, but that it’s not yet on his radar — at least, in the near term.
Safe from the threat of regulation, Aztec Exchange will have the opportunity to expand into more markets, Gabbay said, especially those in which eInvoicing is prevalent, but SMEs face a struggle to access working capital to get their companies off the ground and growing.
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