Finding The Right Tech Mix For Dutch SMB Finance

While small businesses across the globe face pressing cash flow challenges, in the Netherlands, small suppliers’ payment cycles were already feeling the squeeze before coronavirus disruption.

Researchers at Atradius released findings last October that found a spike in the percentage of surveyed small businesses selling to their corporate customers on credit, from 38.6 percent in 2018, to 59.5 percent in 2019.

Average payment terms increased, and average payment delays heightened to 10 days past-due — meaning small- and medium-sized businesses (SMBs) in the country typically wait over a month to see their invoices settled.

At the same time, traditional lenders, like in many parts of the world, have struggled to fill the small business financing gap. In this context, the Dutch Authority of Financial Markets has turned to embracing FinTech players in the market to support SMBs, with the regulator’s latest approval going to Finturi.

According to CEO Johannes Brouwer, the regulatory approval process took nearly a year as regulators sought to understand the invoice financing platform’s use of blockchain to ensure borrowers would be protected. In a recent conversation with PYMNTS, Brouwer said authorities today are seeking to balance opening up the market to FinTech disruptors without exposing small businesses to greater risk.

“I don’t know, but I have the impression we were one of the first companies using blockchain they approved,” he said.

While the technology may remain unfamiliar to many legacy players and regulators in the financial market, blockchain can be a useful solution in streamlining the invoice finance process for small businesses that continue to wait longer for their invoices to be paid.

Accelerating Cash Flow

“In today’s landscape, for SMEs [small and medium-sized enterprises] it’s really hard to get access to money, because the banks are not lending much anymore,” noted Brouwer. “Normally the loans are too small to be profitable.”

It’s a common predicament across the globe, and one that has opened up the door for alternative lenders and digital native FinTechs to explore ways to connect small businesses to more capital. Finturi collects data from the small business to complete Know Your Customer (KYC) assessments and analyze risk, then generates a proprietary health score for a company. If it meets a certain threshold, that small business can submit invoices for financing, with tokenized funds landing in their Finturi digital wallet, which can then be paid out to their bank accounts.

The repayment plan is based on when a small business predicts it will be paid, whether payment terms with clients are 30 days, 90 days or otherwise.

Where blockchain comes in, explained Brouwer, is by deploying smart contract technology to integrate those repayment agreements, as well as interest rate calculations (which are decided based on the health score of the small business), to ensure all parties adhere to their agreements.

The Technology Mix

Blockchain and smart contracts aren’t the silver bullet to combatting invoice financing friction, however.

With invoice financing in particular, banks can struggle with managing the costs associated with mitigating the fraud risk, which can occur if a business submits the same invoice for financing multiple times, or if a document is altered in an effort to obtain more capital.

“It’s not really blockchain that solves this problem,” Brouwer said of how Finturi mitigates this threat.

Rather, artificial intelligence (AI) can automatically identify potential red flags on invoice documents to ensure uploads are legitimate. Proprietary algorithms are also able to adjust small business assessments depending on environmental factors — a critical capability in today’s market, when Finturi is able to elevate its risk exposure in an effort to help more small businesses, while still ensuring viability for both Finturi and the borrower.

But even after the coronavirus crisis, small businesses will continue to need capital as they will inevitably continue to struggle with delayed and late payments. This problem is particularly acute for SMBs working with larger corporate customers, said Brouwer.

Invoice finance isn’t necessarily suitable for all scenarios, however.

“If you have short-term cash problems, in the case of paying your employees or you are growing your business because you have new — extra — orders, invoice finance is perfect,” he said. “If you need long-term money for new, long-term projects, then long-term loans are a better fit, and cheaper.”

But increasingly, Dutch SMBs are working closely with their financial advisors and accountants to assess their options when bank loans remain in short supply. Understanding which FinTech products are available and affordable will not only be essential for small businesses, but also for regulators as they explore ways to expand access to capital.