Apruve Provides Credit Management as a Service

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Michael Noble

Michael Noble, CEO of Apruve

Business buyers want payment terms from their vendors, and B2B sellers want to offer them. After all, extending a line of credit to a customer can lift sales and promote loyalty. Michael Noble, the founder and CEO of Apruve, says, "We see about 2.2 times more order frequency and about 3.3 times more line items per order for customers that are given a line of credit versus asking them to pay with a credit card." It's no surprise that upwards of 80% of B2B transactions involve customer credit. That said, offering payment terms has a downside, which Apruve seeks to mitigate by offering credit management as a service (CMaaS) to B2B sellers.

Few people go into business in order to underwrite credit, send invoices, manage collections, and spend evenings doing bookkeeping. Furthermore, as companies grow, so does their average accounts receivable balance. While offering payment terms can accelerate growth, it can also exacerbate the need for external financing. Finally, extending credit can be risky. Sometimes, customers can't or won't pay their bills.

What if you were able to get the benefit of offering terms to your B2B customers and sidestep the administrative headaches and working capital financing requirements? That's the value proposition of Apruve and other emerging fintech companies specializing in B2B payments.

Like Visa for B2B Commerce

Consumer credit is a huge, established industry. Payment networks such as Visa offer consumers the opportunity to buy now and pay later. Of course, the B2C buyer doesn't pay the retailer. The cardholder pays the bank whose name is printed on the back of her Visa. Instead, the retail seller is paid by the bank—less a transaction fee in the range of 2-3%.

Retailers sell products and services. Banks underwrite and manage credit to customers. Everybody plays the role they want to play. Electronic point-of-sale (POS) systems allow the payment network to run efficiently.

Historically, that's not been the case in B2B commerce. Sellers provided credit to customers and borrowed from the bank to finance the resulting accounts receivable growth. It was a slow, cumbersome, and expensive process. Worse, it's been largely manual. Orders were submitted by phone or fax—until recently there was no equivalent to an electronic POS system. Consequently, invoicing, collections, and cash application accounting was labor-intensive.

Apruve seeks to be the Visa of B2B commerce. B2B customer credit is still underwritten on a seller-by-seller basis, but banks do the underwriting. ERP, accounting, and, increasingly, e-commerce systems play the role of the POS system. Apruve coordinates the information and money flows and automates the invoicing and remittance processes.

B2B sellers can offer terms to their customers, but now they can receive their money (less a 2-3% transaction fee) within 24 hours rather than 30 or more days. Furthermore, sellers no longer have to manage accounts receivable or collections. Because there are no accounts receivable, the seller's working capital requirements are reduced as is their need for external financing.

The Relative Cost of CMaaS

Of course, credit management as a service isn't free. The question is whether it's worth its price. At first blush, the cost of CMaaS appears to be roughly on par with the cost of administering customer credit in-house:

The Relative Cost of CMaaS

At first glance, CMaaS seems to be about equal to the cost of in-house credit management.

(The preceding reflects my estimates of representative costs. Download the spreadsheet to input your own assumptions.)

However, there are advantages to CMaaS that may not be reflected in the comparison of directly observable costs:

  • It's tough to adequately account for the cost of management's time and attention—including the distraction of seeking external financing to fund growing working capital requirements.
  • CMaaS converts the fixed cost of administrative overhead into a variable transaction fee. That's important for a niche producer dependent on market differentiation. Fixed costs compel us to be unfocused.
  • Being a creditor to your customers can be uncomfortable. Do you really want to be a bill collector?

At worst, CMaaS is probably no more costly than managing accounts receivable in-house. Even then, outsourcing your credit management and accounts receivable financing offers qualitative and strategic advantages—including the quality of your business life.