How Digitization Turned Media’s Cash Flow Upside Down

Understanding the industry of a business borrower is a critical component of analyzing risk and needs for a lender. But in some niche markets, particular cash flow characteristics may be best serviced by an expert.

FastPay is an alternative lender zeroed in on one such niche industry. The firm targets digital media businesses. As President and COO Secil Baysal explained, it’s a space that has unique cash flow challenges but is an industry that has seen business models turned on their heads in recent years.

Firms like online advertising networks are facing especially long payment terms, waiting 90 or 120 days to be paid by an ad agency, Baysal said, despite the fact that these firms need to pay their publishers.

“If you’re a high-growth company, even though you may be increasing revenue, you have a cash flow problem,” the executive explained. “You have to pay your bills, but you get paid three to four months later.”

FastPay sees this cash management gap as an opportunity to provide working capital loans to players in the industry. But for lenders in this space, the B2B payments behaviors of these firms can make risk mitigation and creditworthiness assessments particularly challenging — especially today. According to Baysal, while it’s always been the case that digital media companies are paid on long terms by their clients, the digital revolution has complicated B2B payments in unprecedented ways.

“We operate at the junction of the media business going from analog to digital channels,” Baysal said. Payment terms for the analog world weren’t as long as they are today, because running an ad on a platform like TV is definitive.

“You have fewer areas of dispute when you run a TV ad or buy a page in a magazine, because it’s pretty much binary — you can see it, you can hear it,” he said. “So, it’s pretty easy to validate that the campaign has been completed successfully.”

This era of advertising is like an open-and-shut case when it comes to payment term negotiations. But today, in the world of online advertising, there is much more room for discussion and discrepancy.

“In the digital world, you’re talking about millions of views and clicks — a lot of data,” Baysal explained, adding that there is also consideration of the quality of data, whether clicks are real or fraudulent, for instance. “The parties need quite a bit of time to work out those details to agree on the amount to be paid.”

That time alone means added waiting for media firms. That’s one aspect to the long payment terms in this sector, said Baysal. But there’s another component.

“In a more TV environment, you have big brands buying from big media companies,” he said. The industry often saw the likes of Proctor & Gamble buying up ad space on ABC, for example. It’s big business buying from big business. Today, however, many of these media companies running online are smaller.

“The negotiation power is a bit more uneven,” the executive explained. With large clients now able to lead negotiations, smaller media platforms struggle to get the payment terms they need.

On the plus side, however, there is one aspect of the digital media space that can be seen as a positive for both borrowers and lenders: Companies tend to grow very, very quickly.

“We’re operating in a vertical where our clients grow really fast compared to other midsized segments,” Baysal noted. “A dry cleaner typically doesn’t grow 100 percent year to year. In our vertical, it’s much more common to have clients that double revenue every year.”

The high rate of growth, though, can pose another kind of challenge for lenders that struggle to keep pace with a borrower as they move from small, to medium, to large. FastPay’s latest venture, FastPay for Enterprise, is a way for the lender to address larger digital media firms, Baysal explained. The company is teaming up with Hitachi Capital America to provide the capital.

While FastPay is operating in a niche industry with some particularly challenging cash management demands, Baysal said the collaboration with Hitachi exemplifies progress across the business lending sphere. Alternative lenders like FastPay get to use innovative data technologies to make lending less risky. But by teaming up with traditional giants like Hitachi Capital, there’s security in the capital provided, along with extensive lending experience.

While it’s been done before for SMEs, Baysal said the trend is slowly creeping into the large enterprise financing segment.

“We think this is a great model for the industry overall,” Baysal said. “It’s a unique position. A lot of these technology lenders are typically in the consumer or small business space. We think this is a good, early example of a platform that’s able to use that technology to be able to serve larger clients. And we think that’s pretty innovative, from that point of view.”