©2017 Global Business Intelligence. and Trade Financing Matters

David Gustin

President, Global Business Intelligence

CoFounder, Trade Financing Matters

Event Driven Finance –

Where are we now, where are we going?

@davidmgustin

https://ca.linkedin.com/in/david-gustin-cfa-285561

Source: Tiger Hawk Blog

Vancouver

12 Disruptive Technologies according to Mckinsey

Impact Working Capital

1. 3D Printing

2. Mobile internet

3. Automation of knowledge

work – Machine learning, AI

4. Internet of Things

5. Cloud Technology

Others

1. Energy storage

2. Genomics

3. Advanced materials

4. Autonomous vehicles

5. Renewable energy

6. Advanced robotics

7. Advanced oil and gas

exploration and recovery

The world is changing our game.

Source Bob Solomon

Access to the Network Changes the Lending Game!

OEM- Dealer – National Account Model

Network Types and Spend Coverage

• Source to Pay

• Order to Cash

• Treasury Management solutions

• Supplier Management solutions

• Invoice Finance as a service

• OEM-Dealer-Customer networks

• Dedicated supply chain finance platforms – NOT A NETWORK! More a managed service provider.

Percentage/share of spend in

different categories:

– Direct Material

– MRO/catalog

– Specialized: print, telecom,

marketing, logistics, IT, etc.

– Services (simple +

complex)

– Contingent labor

– T&E

– Other indirect/catalog

Where Are We Now?

We see various ALTERNATIVE finance techniques being offered to companies by size:

Technique

Merchant Cash Advances

eFactoring - Single Invoice Finance or group of invoices

Buyer self funded Dynamic Discounting

Purchase to Pay and Other Networks – Third party finance

Marketplace Lenders

Single use Virtual cards or pcards

Working Capital platforms where sellers name their price of funds

Supply Chain Finance

Receivable Auctions

Small

Companies

<$20M

Large

Corporates

>$2bn

Middle Market

Corporates

$20M to $2bn

“Disrupters OR Wannabes”Business Banking

• Checking Account

• Cash Management

• Lending / Credit

- Commercial Purchasing cards

- Line of Credit (Letter of Credit)

- Loans

> Small Business Installment

> Commercial Mortgage

- Working Capital Loans

> Asset Based Lending

> Factoring

> Invoice Discounting Line

> Distributor finance

> Supply Chain Finance

Summary analysis: comparative coverage/capability

New Partnerships... Bank Strategies to Compete SMB Lending

Source: Karen Mills, Brayden McCarthy, HBR.org

Event triggered finance is still all about the Approved Invoice

1. Signed

Contract

4. Shipping

status

verified

2. PO issued 3. Material

ordered

6. Invoice

approved

5. Invoice

issued

Pre Shipment Finance Post ShipmentIn transit

Inventory

Triggers: • Signed

contracts

• Order

confirmation

• Transport

documents• Invoice

issued

• Buyer

approval

• Purchase

Order

Early pay off of an invoice approved comes in two flavors:

• Invoice matched by Buyer and approved to pay and Buyer signs agreement to pay regardless of credit

note adjustment, thus straight buyer risk.

• Contractually committed payables, whereby the invoice has been approved by the Buyer but no

agreement has been signed for credit notes. This is the space P2P and Supplier Networks play.

Other events or triggers, such as purchase order, or ASN released, have seen very little activity with P2P or

Supplier networks.

Low Hanging Fruit –Most Activity centered around Approved Invoice Finance

• C2FO — Undisclosed.

• Basware – Undisclosed.

• GT Nexus (now part of Infor) — Undisclosed.

• Orbian – Undisclosed.

• PrimeRevenue — Actual invoices financed is not

disclosed.

• Taulia - company reached $75 billion in short-term

financing provided to suppliers -the total value of invoices

customers PAID EARLY (as of Jan 2015)

• Tungsten – Publically disclosed. Very small.

Prominent Reverse Factoring Vendors (Non Banks)

Summary analysis: comparative coverage/capabilityS2P OEM- Dealer O2C TMS Supply Chain /

ERP

Dedicated

SCF

Early Pay – Buyer signs

agreement to pay

Early pay – Approved Invoice

(ie, N-way match)

Buyer Self Funded Dynamic

Discounting

Efactoring – Invoice issued, not

approved (ie, Invoice Fin)

Shipping Status (ie, ASN, Bill of

Lading)

Purchase Order Issued

Procurement – Pcard or Virtual

card capability

Third Party Finance option(s)

Sellers able to fund across

buyers (eg, need 100K)

Indirect Spend Coverage

Direct Spend coverage

No Offering Planning Some

functionality

Full

functionality

Types of Networks and Working Capital Coverage

Where Are We Going?

Amazon and the Fly Wheel

$1,100 per year avg. purchases

Amazon Fly Wheel

Global

Expansion

?

Increased

Content /

Services?

The Infrastructure is Maturing to tie Networks with Funders

API’s

Low Code

Platforms

Marketplace

for Risk

Distribution

Artificial

Intelligence

Networks &

real-time

dataInfrastructure

• Move B2B underwriting to as near to 100%

automated as can be.

• Use real-time data as opposed to third

party data that is static.

• Build decision engines that predict high

ability to pay and manage losses to

reasonable levels.

• Use marketplaces developed for investors

to buy assets based on risk / return models

and distribute risk.

• Build applications quickly by business

people, without writing any computer code.

Specialty Fintech lenders are starting

to take advantage of the maturing

infrastructure to:

Analytics as a Service

23

Example datasets:

1. Network data + predictive analytics = supplier take-up of different

early pay options, Third Party v. Own Cash, etc.

2. Traditional AP / Invoice data alongside contract terms/information,

3. Based on invoice-level data, develop smart algorithms that predict

a range of risk parameters, such as the probabilities of default or

expected timing of invoice payment = setting of Dynamic Credit

Limits

4. Warranty/claims data (for both products bought and those sold,

commodity markets information, demand data, etc.)

5. Mapping Structured data and combining with Unstructured Data

Invoice Finance as a Service

Selective invoice finance is becoming more technology oriented and also much

less focused on auctions. This is true receivable finance (or non confirmed

basis)

New models are trying to automate traditional factoring by applying new underwriting

tools via one of three invoice sources:

• integrate via accounting software and have a button to request finance or,

• integrate with einvoicing platforms so when you issue an invoice, can be financed

or

• suppliers can also manually upload and submit invoices to platforms.

Specialty finance lenders playing in this space can establish dynamic credit limits

based on network data or key company information, like a registration number.

Seller

Request

funds

XYZ

Supplier PortalFunder

New Infrastructure enables B2B underwriting to move to 100% automation – an example from a Supplier Portal.

Buyer

Accelerated Cash

Request

Supplier Details

Decision

If yes, change

payee to funder

and inform ERP

of buyer and

PortalAutomated Decision

Engine (Y/N)

Automated Decision Engine assigns

cumulative score based on:

• Business score - liens, taxes, credit,

accounts receivable, etc.

• Personal Value score- personal

credit

• Social Value score - social activity

family data, military

• Trust Fraud score - Fraud Threat,

and compliance

• Loyalty Value score – partnership

history

• Historical Success score - level of

education, career history, etc.

The funder will establish a dynamic credit limit that gets adjusted when invoices are paid.

Accelerated

Cash

Confirmation

Working capital solutions are being added to specific industry sector cloud-based invoicing and payment platforms.

Many of the common elements of

these industries are:

• Complex approval processes

• Fragmented suppliers

• Suppliers with a much higher

cost of capital than buyers

• Regulations or complex

contracts

Sectors or Spend Types which

show promise are:

• Construction

• Logistics and Transportation

• Contract Staffing

• Healthcare

• Oil & Gas

• Media

Specific Sector Solutions

Construction SaaS platforms are now tapping into supply chain finance, a multi-trillion global, untapped market.

Typical Construction Supply Chain

Total annual construction value in the US alone is about $1 trillion. Construction has all of the

desired elements: small, fragmented contractors and subcontractors, big GCs, complex approval

and payment processes, and different rules in every state for how liens work.

So What are Finance Innovators Going After?

• Convergence of data & events

• Working with Networks to apply risk models and

algorithms

• Predictive Buy-side Analytics

• Link the borrower’s accounting system with the

lender’s software (ie, SMB stuff)

• Multi-tier SCF (with Blockchain + Tokens)

• Still early days – looking for scalable volumes to

combine with Capital Markets

Middle Market

What percent of your receivables are funded via: Bank

credit lines? Factoring? Invoice discounting? Adhoc

finance programs like DDM and SCF?

Do MM companies envision moving to more adhoc

financing techniques? For incremental needs?

What does that do to their lending relationships?

Small Business

Speed – but

really confusing

and tiny print!

FinTech Proliferation

Certain extinctions are unpreventable …

but we can learn from what survived

during the last major one on Earth!

Bringing it together

The dislocation of credit and capital markets is bringing massive changes.

Financing is a “hard nut to crack” beyond approved invoices.

The connected commerce world is not going to stop.

What is the next “Black Swan” event – Living in benign credit world for some

time.

Speed – expect a rate of change like nothing else we’ve seen before.

Q A&