Tuesday, April 20, 2010

The Luddite Trajectory

Lud•dite (lŭd'īt) n.

1. Any of a group of British workers who between 1811 and 1816 rioted and destroyed laborsaving textile machinery in the belief that such machinery would diminish employment.

2. One who opposes technical or technological change.
[After Ned Ludd, an English laborer who was supposed to have destroyed weaving machinery around 1779.]

I have to confess these things:

• I remember when the first ATM’s became available and I was unwilling to use them to make a deposit.

• I remember when electronic deposit of paychecks became available and I was unwilling to trust it; preferring to have a paper check in-hand on Friday afternoon.

• My first job was with a large financial institution in an investment department that routinely took weeks to process transactions because so much analysis was done via calculator. We had access to a leased-time mainframe computer which my boss never failed to term “the confuser”.

The Luddites could not change the course of the industrial revolution. My resistance to changes in banking technology was fear-driven and counterproductive. My first boss rendered himself obsolete (or “redundant” in the land of Ludd) in a few short years.

So, where is this going? Three data points:

The first:

I read a report from a British business newspaper this morning about the difficulty that smaller businesses are having collecting money owed them. The reporter made the point that a large percentage of the affected businesses had done nothing yet to change their processes to cope with the cash flow problems.

But, he reported, “9% have turned to invoice discounting and 8% have used factoring”! That was presented in a way that implied that the numbers seem small!

In the US market, achieving a 9% penetration in the invoice discounting business would translate to (at least) tens of billions of dollars of additional employed capital in the industry.

The second:

In this week’s edition of The Economist, also a British publication, an article on small business finance appeared, entitled “Markets for Minnows”. Among the points it makes are:

• Large businesses in developed economies can once again raise capital with ease, principally via the bond market.

• Spreads on loans to smaller businesses (however) are at their highest level in a decade.

• US banks holdings in commercial loans fell in the first quarter at an astonishing annual rate of 21% (this as we are supposed to be in recovery mode).

• Syndicated lending to medium-sized business is at less than half of peak levels.

• “Demand for factoring has fallen over the past year because businesses had fewer invoices to pledge, but is likely to rise sharply as small businesses struggle to finance an upturn in orders….”

• The head of Wells Fargo’s trade capital division sees the factoring market growing by 6-8% per year.

• “Another new form of invoice-based financing is The Receivables Exchange…..which helps users to overcome…the decline of traditional small-business finance and the stretching out of payment by their customers…”

The third:

• An article in last week’s Wall Street Journal (4/15 p B6) analyzed the extent to which small businesses, prior to the housing bust, depended on tapping real estate equity for working capital.

• In 2007 one survey showed that “30% of respondents tapped home loans for funding” their business working capital needs.

• In 2009 that figure had fallen to 7%.

• Based on that comparison, alone, 23% of small businesses have, in a very short time, lost access to one of their principal funding sources.

There is no question that small business MUST find alternate sources of working capital if they are to survive and prosper!

Last month we saw Morgan Stanley identifying TRE as a new and potentially important player on the invoice discounting landscape.

This month The Economist gives it prominent mention as an alternative.

Just last week I was shown promotional material of a company that appeared to be marketing a “copycat” program, which on further investigation actually offered nothing but some additional potential visibility for the Exchange, itself.

Here’s my take-away:

The British and the Europeans, in general, are far in front of the US in the adoption of invoice discounting in the SME community. We can and should learn from them (just this once).

Wells Fargo, now the largest player in the domestic factoring market, sees a 6-8% growth rate in the traditional-factoring sector of the business. That’s hardly a steep growth curve from present levels and hardly an answer for the smaller end of the market.

The SME market for invoice discounting in the US, while relatively immature and small, is one of the only avenues that will be available to meet the financing needs of the SME market going forward.

TRE, for all that it is neither perfect nor mature, offers a true alternative; efficient and scalable.

If it could provide the mechanism to take the US market just halfway from its current invoice-discounting penetration to the 9% level found in the British study quoted above, it would represent a significant avenue for employment of capital, a meaningful stimulus of economic growth and an important engine for job creation.

It took me a couple of years to trust ATM machines and electronic deposits. But thankfully both the world and I change faster now.

New questions are asked. New challenges posed. And in the great American tradition, new answers become available.

The job is to introduce the question to the answer.

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