The next BriefingsDirect digital business innovation panel discussion explores how a finance matchmaker application assists small businesses impacted by natural disasters in the United States.
By leveraging the data and trust inherent in established business networks, Apparent Financing by SAP creates digital handshakes between lenders and businesses in urgent need of working capital financing.
The solution’s participants -- all in the SAP Ariba Network -- are putting the innovative model to good use by initially assisting businesses impacted directly or via supply chain disruptions from natural disasters such as forest fires and hurricanes.
To learn how data-driven supplier ecosystems enable new kinds of matchmaker finance relationships that work rapidly and at low risk, we are joined by our panel, Vishal Shah, Co-Founder and General Manager of Apparent Financing by SAP; Alan Cohen, Senior Vice President and General Manager of Payments and Financing at SAP Ariba, and Winslow Garnier, President of Garnier Group Technology Solutions, LLC in San Diego, California. The discussion is moderated by Dana Gardner, Principal Analyst at Interarbor Solutions.
Here are some excerpts:
Gardner: Vishal, what’s unique about this point in time that allows organizations like Apparent Financing to play matchmaker between lenders and businesses?
Shah: The historical problem that limited small businesses from accessing financial services with ease was lack of trust and transparency. It’s also popularly known as the information asymmetry problem.
At this point in time there are three emerging trends and forces that are transforming the small business finance industry.
The first one is the digitalization of small businesses, such as from digital bookkeeping systems that are becoming more affordable and accessible -- even to the smallest of businesses globally.
The second force is the financial industry innovation. The financial crisis of 2008 actually unlocked new opportunities and created a developed industry called FinTech. This industry’s strong focus on delivering the frictionless customer experience is the key enabler.
And the third force is technological innovation. This includes cloud computing, mobility, and application programming interfaces (APIs). They combine to make it economically feasible to gain access to financial information about small businesses that is stored in today’s digital bookkeeping systems and e-commerce platforms. It's the confluence of these three forces that solve that information asymmetry problem, leading to both reduction of risk and cost to serve small businesses.
Gardner: Alan Cohen, why is this new business climate for small- to medium-sized businesses (SMBs) a perfect fit for something like the SAP Ariba Network? Tell us how your business model and business network are helping Apparent Financing with its task.
Cohen: Think about it in two ways. First, think differently about combining the physical and the financial supply chains. Historically, the Ariba Network has been focused on connecting buyers with their suppliers. Now we are taking the next step in this evolution to better connect the physical with the financial supply chain to provide choice and value to suppliers about access to capital.
The second piece of it is in leveraging the data. There’s a ton of excitement in this world for artificial intelligence (AI) and machine learning (ML), and I am a big proponent of all of that. These are going to be awesome technologies that will help society and businesses as they evolve. It’s super important to keep in mind that the strength of the Ariba Network is not just its size -- $2.1 trillion in annual spend, 3.4 million buyers and suppliers -- it’s in the data. The intelligence drawn from this transactional data will enable lenders to make risk-adjusted lending decisions.
And that real data value goes beyond just traditional lending. It also helps lenders assess risk differently. This will help transform how lending is done to small and medium-sized businesses as time evolves.
Gardner: Some of these trends have been in the works for 20 or 30 years but are now coming together in a way that can help real people benefit in real situations. Winslow, please tell us about Garnier Group Technology Solutions and how you have been able to benefit from this new confluence of financing, data, and business platforms.
Rapid recovery resources
Garnier: Garnier Group Technology Solutions provides intrusion detection, installation services, security cameras, and Wi-Fi installation primarily for corporations and municipalities. We are a supplier and an installer with consistent requirements for working capital to keep our business functioning correctly.
A major challenge showed up for us in late 2017 when the Southern California fires took place. We had already ordered product for several installation sites. Because of the fires, those sites actually burned down. The time needed to recover from already having spent the capital, plus the fact that the business was no longer coming our way, created a real need for us.
We previously looked at working capital lines and other resources. The challenge, though, is that it is fairly complex. Our company is really good at what we do, but we are not good at finding financing and taking the time to interview multiple banks, multiple lenders. The process to just find the right type of lender to work with us -- that in itself could take four to six months.
In this case, we did not have the time or the manpower to do the due diligence necessary to make that all happen for us. Also, on a day-to-day basis, in dealing with large corporations, we can hope to get paid in 30 days, but in reality that doesn't happen. But we still need to pay our suppliers to maintain our credit terms and get delivery when required by making sure they get paid on the terms that we have agreed to.
We were fortunate to then be introduced to Vishal [Shah at Apparent Financing]. From that point on, he turned into a one-stop shop for us. He took what we had and worked with it, under the SAP guidance. That helped us to have confidence that we were working with a credible source, and that they would deliver on what we agreed to.
Gardner: We see that SMBs can be easily disrupted, they are vulnerable, and they have lag times between when they can get paid and when they have to pay their own suppliers. And they make up a huge part of the overall economy.
Vishal, this seems like a big market opportunity and addressable market. Yet traditional finance organizations mostly ignore this segment. Why is that? Why has bringing finance options to companies like Garnier Group been problematic in the past?
Bank shies, Network tries
Shah: Going back to early 2008 when the global financial crisis started, there was a lot of supply in the market and small businesses did not have to struggle as much to get access to capital.
Since then, banks have been faced with increasing regulatory burdens, as well as the fact that the cost to serve SMBs became much larger. Therefore the mainstream banks have shied away from lending to and serving this market. That has been one of the big factors.
The second is that banks have not truly embraced the power of technology. They haven’t focused on delivering customer-centric propositions. Most of the banks today are very product-centric organizations, and very siloed in their approach to serving customers.
The fundamental problems were, one, the structure of the banks and the way they were incentivized to serve this market. And secondly, the turn of events that happened post the financial crisis, which effectively resulted in the traditional lenders just backing out from this market, significantly reducing the supply side of the equation.
Banks have not truly embraced the power of technology. They haven't focused on delivering customer-centric propositions. Most banks today are very product-centric and siloed.
Gardner: Alan, it’s a great opportunity to show how this model can work by coming to the rescue of SMB organizations impacted by natural disasters. But it seems to me that this is a bellwether for a future wave of business services because of the transparency, data-driven intelligence, security, and mission-critical nature of SAP and SAP Ariba’s networks.
Do you see this as I do, as an opening inning in a longer game? Should we be thinking newly about how business networks and data-driven intelligence fosters entirely new markets and new business models?
SMB access to financing evolves
Cohen: Absolutely. I see this as the early stages of an evolution. There are a few reasons. One is ease. Winslow talked about it. It can be very hard for small businesses to access different banks or lenders to get financing. They need an easier way to do it. We have seen transformation in consumer banking, but that transformation has not followed through into business banking. So I think one opportunity is in bringing ease to the process transformation.
Another piece is trust. What I mean by that is the data from SAP and SAP Ariba is high-quality data that lenders can trust. And being able to trust that information is a big part of this process.
Finally, like with any network, being able to connect businesses with lenders has to evolve -- just as Ariba has connected buyers with suppliers to transact. This is a natural evolution of the SAP Ariba Network.
I am very excited. And while we are still early in a longer journey, this process will fundamentally change how business banking is done.
Gardner: Winslow, you had an hour of need. Certainly by circumstances that were beyond your control. You heard from Vishal. What happened next? How were they able to match you up with financing, and what was the outcome?
Garnier: The really unique thing here is that we were able to submit a single application to allow us to have offers by more than one lender. We decided on and agreed that it made sense select Fundation as the lender of choice. All the lenders were competitive, but Fundation had a couple of features that were specific to our business and worked better for us.
I have to tell you, at first I was skeptical that we would get this done soon enough. At the same time, we had confidence -- having worked through the SAP Ariba Network previously. Once we submitted the application, we stopped looking for other resources because we felt that this would work for us. Fortunately, it did end up that way.
Within 30 days we were talking with lenders. We received a term sheet to understand what would be available for us. That gave us time internally to make decisions on what would work best. We closed on the transaction and it's been a good working relationship between us and Fundation ever since.
Gardner: Is this going to be more than a one-shot deal, a new business operating model for you all? Are you going to be able to take a revolving line of credit and thereby have a more secure approach to business? This may even allow you to increase the risk you are willing to take to find new clients. So is this a one-shot, band aid -- or is this something that’s changed your business model?
Not just reparations, relationships
Garnier: Oh, absolutely. Having a revolving line of credit has become a staple for us because it’s a way to maximize our cash flow within our business. We can add additional clients now and take on new jobs that we may have still taken on, but we would have had to push them out later in time.
We are able to deliver our services faster at this point in time. And so it is the absolute right solution for what we needed and what we will continue to use over time.
Having a revolving line of credit has become a staple for us because it's a way to maximize our cash flow within our business. We can add additional clients and take on new jobs.
Gardner: Vishal, it's clear that organizations like Garnier Group are benefiting from this new model. It's clear that SAP and SAP Ariba have the platform, the data, and the integrity and trust to deliver on it.
But another big component here is to make sure that the financing organizations are comfortable, eager, and are gaining the right information to make their lending decisions. Tell us about that side of the equation. How do organizations like Fundation and others view this, and how do you keep them eager to find new credit opportunities?
Shah: If you think of Fundation, they are not a typical bank. They are willing to look at any e-commerce platform and any technology service providers as new distribution channels through which they can access new markets and a new customer base.
Beyond that, they are using these channels as a way to market their own products and solutions. They have much bigger reasons to look at these ecosystems that we have developed over the years.
In my view, traditional banks and lending institutions look at businesses like Garnier Group using what I call the rearview mirror. What I mean by that is lenders mostly base their lending decisions or credit decisions by obtaining information from credit bureaus, which they believe is an indicator of past performance. And that good indicator of their past performance is also taken as an indicator of good future performance, which, yes, does work in some cases -- but not in all.
By working with us, lenders like Fundation can not only look at traditional data sources like credit bureaus, they are able to also assess the financial health and the risk of lending to a business through alternative data sources like the one Alan mentioned, which is the SAP Ariba supply chain data. This provides them an increased degree of confidence before they make prudent lending decisions.
The data in itself doesn't create the value. When processed in an appropriate manner -- and when we learn from the insights the data provides – then our lending partner gains a precise view of both the historical business performance and a realistic view of the future position and future cash flow positions of a small business. That is an incredibly powerful proposition for our lending partners to comfortably and confidently lend to businesses such as Garnier Group.
Gardner: This appears to be a win, win, win. So far, everybody seems to be benefiting. Yet this could not have happened until the innovation of the model was recognized, and then executed on.
So how did this come about, Alan? How did such payments and financing innovation get started? SAP.iO Venture Studio got involved with Apparent Financing. How did SAP, SAP Ariba, and Apparent Financing come together to allow this sort of innovation to take place -- and not just remain in theory?
Data serves to simplify commerce
Cohen: Like anything, it begins with the marketplace and looking at a problem. At the end of the day, financing is very inefficient and expensive for both suppliers and lenders.
From a supplier perspective, we saw this as an overly complex process. And it’s not always the most competitive because people don’t have the time. From a lender perspective, originating loans and mitigating risk are very important. Yet this process hasn’t gone through a transformation.
We looked at it all and said, “Gosh, how can we better leverage the Ariba Network and the data involved in it to help solve this problem?”
SAP.iO is a venture part of SAP that incubates new businesses. About a year-and-a-half ago, we began bringing this to market to challenge how things had been done and to open up new opportunities. It’s a very innovative approach to challenge the status quo, to get businesses and lenders to think and look at this differently and seize opportunities.
And if you think about what the SAP Ariba Network is, we run commerce. And we want the lenders to fund commerce. We are simply helping to bring these two together, leveraging some incredible data insights along with the security and trust of the SAP and SAP Ariba brands.
Gardner: Of course, it’s important to have the underlying infrastructure in place to provide such data availability, trust, integrity, and support of the mission-critical nature. But in more and more cases nowadays, the user experience and simplicity elements are terribly important.
Winslow, when it came to how you interacted with the process, did you find it simple? Did you find it direct? How important was that for you as an SMB to be able to take advantage of this?
Garnier: We found it very straightforward. It didn’t require us going outside of the data we have internally. We didn’t have to bring in our outside accounting firm or a legal firm to begin the process. We were able to interface by e-mail and simple phone calls. It was so simple. I’m still surprised that, based on our previous experiences, we were able to get this to happen as quickly as it did.
Gardner: Vishal, how do you account for the ability to make this simple and direct for both sides of the equation? Is there something about the investments SAP has made over the years in technology and the importance of the user experience?
How do you attribute getting from what could be a very complex process to something that’s boiled down to its essential simplicity?
Transparent transactions build trust
Shah: A lot of people misunderstand the user experience and co-relate that to developing a very nice front end, creating an online experience, and making it seamless and easy to use. I think that is only a part of the truth, and part of the story.
What goes on behind that nice-looking user interface is really eliminating what I call the friction pointsin a customer’s journey. And a lot of those friction points are actually introduced because of manual processes behind those nice-looking screens.
What goes on behind that nice-looking user interface is really eliminating what I call the friction points in a customer's journey. A lot of those friction points are actually introduced because of manual processes behind the nice-looking screens.
Secondly, there are a lot of exceptions -- business exceptions -- when you’re trying to facilitate a complex transaction like a financial credit transaction.
You must overcome these challenges. You must ensure that customers and borrowers have a seamless customer experience. We provide a transparent process, accessible to them so they know every single point in time: Where they are with their credit process, are they approved, are they disapproved, are they waiting on certain decisions, or are they negotiating the deal with the partner?
That is one element, we bring in an increased level of transparency and openness to the process. Traditionally these services have been opaque. Historically, businesses submit applications to banks and literally wait for weeks to get a decision. They don’t know what’s going on inside the four walls of the bank for those many weeks.
The second thing we did is to help our partners understand the exceptions that they traditionally encounter in their credit decision process. As a result, they can reduce those manual exceptions or completely eliminate them with the help of technology.
Again, the insights we generated from the data that we already had about the businesses helped us overcome those challenges and overcome the friction points in the entire interaction on both sides.
Gardner: Alan Cohen, where do you go next with this particular program around financing? Is this a bellwether for other types of business services that depend on the platform, the data integrity, and the simplicity of the process?
Win-win lending scenarios
Cohen: Simplicity is, I think, first and foremost. Vishal and Winslow talked about it. Just as you can get a consumer loan online, it should be just as simple for a business to get access to capital online. Make that a pleasurable process, not a complex process that takes a long time. Simplicity cannot be underrated to help drive this change.
When it comes to the data, we’ve only scratched the surface of what can be done. We talked about risk-adjusted lending decisions based on transactional information. What we’ll see more of is price elasticity, around both risk and demand, come into play as banks help to better manage their portfolio -- not with theoretical information but through practical information. They’ll have better insights to manage their portfolios.
Let’s not lose sight of what we’re trying to accomplish: Broaden the capital availability to the community of businesses. There are so many different types of lending scenarios that could happen. You’ll see more of those scenarios become available to businesses over time in a much more efficient, cost-effective, and economic manner.
It’s not just a shifting of cost. It will be an elimination of cost -- where both parties win in this process.
Gardner: Winslow, for other SMBs that face credit issues or didn’t pursue revolving credit because of the complexity, what advice can you offer? What recommendations might you have for organizations to rethink their financing now that there are processes like what Apparent Financing provides?
Garnier: If I take a step back, we made the classic mistake that we should have put in place a bank line of credit prior to this event happening for us. The challenge was the time needed for the vetting process. We would rather pursue new clients than spend our time having to work with the different lenders.
Financing really is something that I think most small businesses should pursue, but I highly recommend they pursue it under something like what Apparent Financing has arranged. That’s because of the simplicity, the one-stop portal to find what you are looking for, the efficiency of the process, and the quality of the lenders.
All the folks that we ended up speaking to were very capable, and they wanted to do business with us, which was really outstanding. It was very different from the pushback and the, “We’ll let you know within the next 30 to 60 days or so.” That is very challenging.
We have not only added new clients since we put in the revolving credit, but our DUNS score has improved, and our credit-rating has continued to improve. It’s low risk for an SMB to look at a platform like Apparent Financing to see if this could be useful to them. I highly recommend it. It’s been nothing but a positive experience for us.