Two Fintech Startups Tackle Small-Business Problem: Slow Payers

Large companies can be willfully lazy about paying their bills on time, sometimes keeping their suppliers waiting for 60, 90 even 120 days. But those suppliers — many of which are small businesses — have bills to pay, too, and they often can't wait two to four months to get paid.

That's where technology startups Payplant and Tradeshift come in. In what might be described as a modern, Internet-based equivalent of factoring, the firms offer cash advances to small companies that can't afford to wait for invoices to be paid. When the invoices are finally paid, the lenders are paid back.

Tradeshift works with banks, which provide the financing, while Payplant uses its own funding. They're taking advantage of cloud computing to quickly integrate with accounting and enterprise resource planning systems. They're also using web-based workflow to handle the invoice approval and payment process.

Payplant launched a service Monday called Pay Me Now that aims to help small companies deal with larger ones that don't pay their bills on time.

Suppliers to go Payplant's site, answer several questions, provide permission to access their tax records, and upload invoices. Payplant verifies the invoice with the larger customer, and wires the invoice amount to the small business at a rate of 1.2% per month. The money comes from the Payplant Alternatives Fund, which expects to lend $100 million in the next year. Payplant has been in beta since last July.

Ronjon Nag, its co-CEO, has witnessed the need for such a service first-hand. "When we were starting, we found we couldn't get financing," he says. "Even though we had AT&T and other large customers, banks wouldn't lend us money or factor our invoices because they didn't understand our customers or our business. We had to use credit cards."

One of its clients is the state of Illinois. In an act of self-flagellation, the state, which has billions in past-due invoices, passed a law that requires it to pay a 1% penalty every month it's late in paying a bill. Payplant now pays the state's bills right away — and pockets the penalty fee.

"They're using it as a business credit card to pay their vendors," Nag says. "They have lumpy cash flow and can't afford to pay on time."

Nag doesn't see Payplant as a competitor to banks, noting that many of the small businesses it works with are not on banks' radar

"When companies are small, banks find them too small to work with," he says. "They're not willing to grow with the company. Banks would rather wait until they're bigger."

When large companies pay their suppliers after 30 to 90 days, those suppliers then often have trouble getting credit, which hurts their ability to grow and hire people, says Christian Lanng, who launched Tradeshift in 2010 and is its chief executive. "Ninety days can mean life or death for a small company," he says.

The big companies on the other side of the equation — the slow payers — also have need of Tradeshift's service, he says. Large companies struggle with inefficiencies in the supply chain, he says. They process millions of transactions a year, many of them by paper.

Tradeshift provides payors and payees a cloud-based platform for handling invoices. When a supplier sends an invoice, it goes electronically straight through to the large company's enterprise resource planning system, through integrations Tradeshift takes care of behind the scenes. (The company supports Oracle, SAP, JD Edwards, and other ERP systems.)

DHL, a Tradeshift customer, has 50,000 suppliers globally, is triple-A rated and pays its suppliers after 45 days. DHL shares information on Tradeshift about invoices it's approved, say from a cleaning company or health services provider. Shortly after an invoice is issued, DHL might commit to paying it within a certain timeframe, such as 45 days.

Citigroup, which is a Tradeshift partner in Europe, might then offer the supplier early payment on the invoice, at a "competitive" rate, through an app it created for the Tradeshift platform. If the supplier agrees, the bank makes itself the payee in the Tradeshift system and forwards the money to the supplier.

Tradeshift, which has been operating in Europe since 2010, and recently expanded to the U.S. has raised $120 million in venture capital. It sells its service to Fortune 500 companies. Many, like DHL, are in logistics. The service is free for the suppliers who submit invoices.