Invoice-Based Financing: Automating-Trust
By Isabelle Levent, Moritz Pascal Stephan, Tommy Tang
Executive Summary
Invoice based companies–consulting, media production, construction, publishing, etc.–deal with particularly acute working capital constraints. Industry standard is currently set at net-30, net-45, and net-90 day payment terms, a relic from trade financing meant to give buyers time to sell the manufactured goods purchased in order to pay suppliers. These terms mean service-based companies, especially young companies or those without large cash stores, are struggling to meet payroll and are forced to make decisions based on short-term survival rather than long-term growth.
Current Ecosystem: Pain Points
From our interviews with Black, Hispanic, Indigenous, Disabled, and Historically Underrepresented (BHIDURs) founders in media and media adjacent businesses, we heard about struggles with cash flow, predatory lending options, and frustrations about passing on growth opportunities due to capital constraints. Founders took smaller contracts to meet payroll and turned down larger contracts that could have promoted growth. When looking for loans, digital banks and invoice factoring companies offered high fees and were only tenable after leveraging network connections for better deals.
Traditional banks have invoice financing options, but focus on larger loans (upwards of 3-5M). The effort put into doing due diligence for small and large loans is identical. There is a lot of manual labor and analysis in order to mitigate risk, authenticate invoices and businesses, and create trust. Focusing on larger loans makes financial sense, but excludes SMBs that might become valuable clients in the future.
Our Solution
By centralizing invoice lending, we can leverage insights gained from past lending and repayment activity. Cryptographically verified invoices and partial payments for intermediate goals help mitigate risk for lenders and accelerate the lending process. Over time, this data will become the foundation of our business credit score.
On May 25th, 2022 the Redesigning Finance students presented their work to a panel of in-person and virtual panel of experts working within Apple, Silicon Valley Bank, and entrepreneurs in various industries.
