An enterprise software company based in Chicago called Mediafly offers as good a case study as we’ve seen on the benefits of supplier finance. The privately held start-up has grown 1,000 percent in revenue since 2010 largely as a result of such financing, according to CFO Johnathan Evarts.
In an interview yesterday, Evarts described how in 2011 the company, which until then was financed largely by “angels,” offered a major entertainment company that used its software system for moving content among mobile devices an enhancement along with a few basis points of revenue in return for payment in 15 days instead of 60, and parlayed the cash into development of that enhancement. And by taking that approach with other customers, Mediafly has managed to do without venture capital or bank financing.
“The payments of our buyers are our main vehicle of finance,” Evarts said.
As Evarts explained, the enhancement involved encrypting the company’s most valuable content, preproduction television content–including rough and final cuts–to protect it from theft as it was transferred among employees via their mobile devices.
Mediafly not only sold the encryption-enhanced system to the entertainment company but also offered it to a bank shortly thereafter. Since then, Mediafly has sold its system to a number of other large companies, not just in media and finance, but also in consumer products manufacturing and technology. Among its customers are MillerCoors, Pepsico and Thermo Fisher Scientific. “We’re talking to, or contracted with, a number of the largest folks in the world, most if not all of them,” says Evarts.
He credits supplier finance for a lot of that. As Evarts puts it, “it can accelerate our innovation and is faster and less expensive than bank or investor financing.”
And now, said Evarts, the company is in a better position to obtain bank financing or venture capital. Because it relied before on only a few big customers for business, banks were wary of lending to it. And those that were willing to do so would have charged a premium for the financing. Venture capital would have been similarly standoffish.
“We didn’t have the balance sheet or P&L” that lenders or investors require, Evarts said.
No longer, he notes. “Now we’re in a position to have those discussions on our terms.”
Of course, electronic invoicing via the cloud-based Ariba business network eases the work involved in supplier finance, Evarts notes, simply because “it digitizes everything.” Ariba is owned by software giant SAP.
Not that using Ariba is without challenges. The CFO notes that it requires “change management” and training of everyone involved in the payment process. And that includes customers.
But with interest rates so low, they have a significant incentive to learn how to use it to help their suppliers–or at least those they value highly.
Would that incentive disappear if interest rates rose, as they are expected to do once the Federal Reserve further tightens monetary policy? Not necessarily, says Evarts. Thanks to dynamic discounting, the terms on supplier finance can be adjusted to maintain its appeal to both customers and buyers as interest rates change. As a result, he says, even in a higher-rate environment, “it can still be worth their while.”