The Benefits of a Marketplace Approach to Working Capital Finance
Our prospects often approach us to better understand the benefits of a marketplace solution to optimize their working capital in comparison to traditional single funder solutions. Below are key areas where clients can benefit from selecting a marketplace approach:
- Offers the opportunity to optimize working capital flexibly without requiring complex implementation and daily management efforts
- Gives the freedom to define the optimal program setup by allowing different products and services to be combined individually per customer
- Provides deeper insights into a customer’s overall working capital initiatives by merging separate financing programs into a single location
- Allows to scale and expand focus of programs faster by aiming for a full digitization and automation of key processes
The Evolution of Working Capital Finance Solutions
Due to the importance of working capital for a company, different solutions to help optimize (or reduce) it efficiently and effectively, have been around for some time. Two of the most commonly used solutions are Supply Chain Finance and Factoring programs.
Up until the late 2000s, the Working Capital Finance market was dominated by banks and factoring providers, each offering their own unique solutions. As a result, medium and large companies with more complex working capital requirements, ended up with multiple programs run with different vendors all using different legal contracts, accounting treatments, and varying technical integrations. Although it worked, it did increase the costs and risks considerably when running such initiatives on a global scale.
The Marketplace Approach Enters the Stage
Supported by a global drive towards digitalization a new type of Working Capital Finance vendors entered the scene. Instead of only specializing in a single financing solution, they built marketplaces that allowed clients to define their own solutions by choosing from different services and products. The marketplace approach follows some key principles:
Working Capital Finance marketplaces are web-based and do no longer require any hardware or expensive software licenses. They are often marketed as Software-as-a-Service applications. The rise of such applications has lowered the entry barrier for interested companies considerably. Without any large upfront project costs to consider, customers can test and verify the solution by running pilot projects and proof of concepts prior to rolling out the solution across the entire company.
2. System Integration for Automation
A key requirement for effective Working Capital Finance solutions is the ability to scale easily through process automation. To achieve true automation, the integration between marketplace and customer’s ERP system is key. But as customer’s internal IT departments are often considerably stretched with their own projects, integration must be as easy and effortless as possible. As a result, marketplaces offer integration add-ons that allow companies to start with no internal development effort and only minimum customization required. Removing the need for costly implementation projects allows companies from all sizes to benefit from such programs.
3. Multi-Funder Capabilities
By splitting the technical and financial infrastructure, customers benefit from a degree of choice when it comes to the optimal group of funding partners. They can freely choose between their house bank, other relationship banks, or new funder types (e.g. asset managers) to increase competition. Customers have full control of and transparency on who is doing business with them and the group of funders can be managed actively on the marketplace without any additional integration effort, allowing customers to react flexibly to changes in their Working Capital Optimization strategy.
4. Multi-Product Offering
The value of a marketplace is defined by the quality and range of services and products it provides. Thus, the more functionality a marketplace can offer, the greater the service and the satisfaction of its customers. With regards to Working Capital Optimization, this means that a customer can choose between different products such as dynamic discounting, reverse factoring and factoring solutions and how he best wants to deploy them (e.g. geography, supplier group) all from the same platform. Additional services include reporting and advanced analytics, supporting the customer to optimize his strategic goals.
In order for marketplace participants (i.e. creditors, debtors, and financing parties) to engage efficiently, standards are required to which all trading partners agree to. A marketplace creates such common standards, including a single set of contracts and a uniform accounting treatment, to ensure that all participants speak the same language when interacting with each other. Having a common understanding and a set of shared rules, will greatly improve the efficiency of the interaction, open new business and cross-selling opportunities and greatly reduce the costs of transaction for all parties involved.
To Summarize the Marketplace Approach
The marketplace approach is a great alternative for customers who are looking for a flexible, scalable, and efficient product offering with a lower degree of manual processes and the ability to have a full overview over the entire spectrum of Working Capital Optimization initiatives.