In the last few years, many B2B marketplaces have emerged globally across various verticals. Two types of marketplace models have become most prominent –

(1) Open marketplace models: where buyers can choose which supplier to work with based on the availability and credentials of the supplier.

(2) Managed marketplace models: where the buyer gives the requirement to the marketplace and the marketplace chooses the supplier.

Examples of an open and closed marketplace in the consumer world would be Amazon and Uber respectively. In a B2B marketplace both buyers and suppliers are businesses, which makes the business models slightly more complex. Both suppliers and buyers can be an SMB or a large enterprise, both of them come with their own challenges.

In our experience, most B2B managed marketplaces aggregate small unorganized suppliers in order to provide more reliable service to larger buyers. Larger buyers often dictate the payment terms and enjoy a credit period of 30 to 90 days. While on the other hand, suppliers being small and cash strapped don’t have enough liquidity to extend these long credit periods. In such cases, these B2B marketplaces have to facilitate the working capital to make the transaction happen i.e. they give payments to suppliers in advance or after 7-15 days and collect the payment from buyers in 30 to 90 days. This is an integral part of all B2B transactions, which means that growth of the marketplace is dependent on the extent of working capital financing the platform can provide.

At an early stage, B2B commerce startups have no credibility to secure debt or dictate payment terms and hence are forced to use equity capital to fund this working capital requirement. Equity is surely not the best way to fund the working capital requirements of a business. Firstly, equity capital is costly and is better off spent on building growth levers for the business. Secondly, funding working capital from equity often becomes a bottleneck for business growth. From time to time, early stage startups reach a point when their revenues exceed the amount of equity capital they have raised, as a result of which they are unable to realize their growth plans.

Below are some of the ways through which B2B commerce companies can solve for working capital at different stages in their journey and prevent WC from being the bottleneck for their growth.

Venture Debt

Venture debt is debt financing for venture backed startups. This instrument is relevant after the company has raised Pre-series A / Series A / Series B funding from VCs. It is often the only option to get debt for early stage venture backed companies. 

Venture debt firms offer debt financing to fund operations as well as working capital. Typically offers mid-term loans at  interest rates of ~13-14% for a fixed tenure and some grace period before principal repayment starts. The amount lended typically depends on the scale of the company and the funding raised.

Venture debt firms want to build conviction on the business viability and hence fund companies with consistent revenue streams and clear value proposition. They also look for VC backing and cash in the bank. They will typically shell ~20% of cash as venture debt to the company.

Working Capital Demand Line (WCDL)

Relevant from Series A onwards, this is unsecured credit lines provided by financial institutions or venture debt firms to fund working capital needs of a startup. The amount depends on the working capital gap in the business and can go upto 75% of the gap.

Venture debt firms and NBFC offer WCDL at interest rates of 12-14%. Banks can offer much lower interest rates, around 9-10%, but they need security / personal guarantee against the loan. 

For WCDL, financial institutions look at the health of account receivables, supply terms, net DSO in working capital and collection process.

Invoice Discounting

For companies with highly credible enterprise buyers, invoice discounting is one of the easiest ways to fund their working capital. Financial institutions extend a loan to the company against the company’s unpaid account receivables as collateral. Typical lenders finance 80-90% of the invoice value at an interest rate of 12%. Invoice discounting usually happens for invoices to buyers with high credit ratings, usually AAA or AA.

Companies with enterprise buyers but slightly lower credit rating (A, BB and BBB) can still get their invoices discounted through retail borrowing, albeit at a higher cost of 15-20% depending on the rating. Platforms that facilitate retail borrowing for this purpose are KredX, Creditmonk.

In invoice discounting, while the loan is not on the company’s books, in most cases it is still the company’s liabilities. Therefore financial institutions sometimes demand for 10-20% collateral as security for invoice discounting. Sometimes banks do take the risk – termed as Invoice factoring – which is nothing but invoice discounting for highly credible AAA rated enterprise buyers.

While the above solutions are relevant to solve for working capital in the early stages, there are 2 big challenges with all of them:

  1. High risk: In all the above cases, the company is liable to pay in the event of any default from buyer, order cancellation, material rejection or loss of business due to any operational reasons.
  2. Lack of scalability: Financial institutions wants to limit their exposure to one company and therefore there is an upper cap to the amount of Venture Debt and WCDL one can procure as they scale

As B2B commerce marketplaces scale beyond $1-2M monthly GMV, they will need to build for more scalable and lower risk solutions. There are 2 potential directions B2B commerce companies can take to solve this issues:

Become a platform to directly enable vendor financing through NBFCs

Instead of taking loans on it’s own books, the platform acts as an anchor to secure WC lines for its vendors directly from NBFCs. As an anchor, the platform builds the vendor profile using the past transaction data with the vendor. The loan is on the vendor’s books and the first liability lies on the vendor. However, as an anchor the platforms are expected to provide corporate guarantee of upto 25% of the loan amount as FLDG*, since the underwriting is done based on its data.

*FLDG – First Loan Default Guarantee – is an arrangement through which businesses are able to offer loans without maintaining any regulatory capital. It is a tri-party arrangement between the lender (Bank or NBFC), the borrower (customer or supplier) and the third party (in this case B2B startups). The third party facilitates the loan between the lender and the borrower and compensates the lender if the borrower defaults. Most new-age technology players who want to partner with large banks or NBFCs for invoice discounting or vendor financing offers this guarantee to them.

This approach has multiple benefits. It reduces the risk for the company and is more scalable. Moreover, this can also become a revenue function as companies can take additional margin to facilitate the financing to its suppliers, who are unlikely to get the loan directly from the NBFC without the platform being the anchor.

In some cases where the vendors are large, they may not want to take direct loans on their own books. There are new payable financing solutions where NBFCs finance the outstanding payables against FLDG provided by the platform. Few companies offering this solution are Vivriti and CredAvenue.

Start an NBFC of your own

Since financing is an integral part of growing a B2B commerce startup depending on external partners for financing may be challenging at scale. Sometimes it makes strategic sense to start an NBFC on your own to be able to source capital at lower cost. However, becoming an NBFC is a topic in itself and we will share our thoughts on the same in another blog.

If you are building a B2B managed marketplace solving supply chain problems in a large category, we would love to talk. Write us at