Arex raises EUR3 million to build invoice financing marketplace
04 November 2016 | 3621 views | 0
AREX, a trading platform on which small and medium-sized businesses (SMBs) can sell their unpaid invoices to boost vital cash flow, today announces that it has raised €3m (£2.7m) in a round led by Finland’s Lifeline Ventures, alongside Robin Klein, general partner and co-founder at renowned London-based investors LocalGlobe.
Founded in 2014 by a team of serial entrepreneurs with wide-ranging experience in fin-tech, financial services and database architecture at Maventa (electronic invoicing), Wall Street Systems (FX and treasury), J.P. Morgan and Skype, AREX - which stands for ‘Account Receivables Exchange’ - is setting out to transform the way cash-squeezed SMBs access short-term finance.
A perfect storm of sector trends have converged to create an increasingly difficult trading environment for SMBs globally. First, since the credit crunch, measures introduced to strengthen the regulation, risk management and supervision of the banking sector have choked off the supply of money banks have available to lend to businesses, reducing by around 50 per cent the cash loaned to SMBs annually.
Simultaneously, a fundamental operational shift in the way many SMBs are configured has taken place, which has seen them move away from acquiring fixed assets such as real estate, in favour of leasing or subscribing to products and services instead. This doesn’t just apply to internet or software companies, who went from owning their own servers to leasing bandwidth from the likes of Amazon, but also to traditional sectors such as construction, where firms are now more likely to lease machinery, than own it - placing an ever-greater strain on working capital.
Meanwhile, many of the larger players and bulk buyers have leveraged these
gravitational shifts to extend their own payment terms, meaning that SMBs are increasingly facing situations in which their suppliers are asking to be paid immediately, whereas their customers are taking 90 days to pay them. With, typically, VAT and three payrolls to cover before they themselves receive payment, such companies are being squeezed from all sides.
‘New asset class’
Against this backdrop, and with lenders often opting to prioritise larger businesses with fixed assets, SMBs are increasingly finding that borrowing against unpaid invoices is one of the most effective ways to enhance their cash flow, explains AREX’s founding CEO Kim Forsman. “The factoring industry - already a $2tn market globally - is one which has remained largely manual and little-changed by technology, with SMBs obliged to sell their invoices via intermediaries at hugely disadvantageous terms. By building a live, automated and algorithm-based trading platform, where companies can set their own prices for their invoices, AREX is enabling both SMBs and the larger corporates who use our exchange to instantly turn their unpaid invoices into cash.
“In addition, because investors and businesses are connected directly on our platform, without a middleman, the total cost of the transaction is reduced by up to 70%, meaning that they keep more of their own money -- AREX charges just 0.25% per invoice financed,” Forsman continues. “Furthermore, the AREX exchange is entirely flexible, with no commitments beyond an individual invoice for the participating business. On the investor side, because we enable multiple investors to participate in a single invoice, their portfolios are highly diversified, ensuring much more efficient risk-management.”
Already operational in Finland, and due to launch in the U.K. next year, AREX currently has offices in London, Helsinki and Barcelona. Forsman - alongside cofounders Perttu Jalkanen, Hannu Krosing and Nikolai Hentsch - plan to use the investment for further product development and to underpin AREX’s launch into the U.K. market.
With less than 3 per cent of invoices worldwide sold to factoring companies today, it’s thought the total factoring market could be worth up to $70tn globally, says Timo Ahopelto, Founding Partner at lead investors Lifeline Ventures. “Kim and the team are building an entirely new asset class, that is both a new model for investors, enabling them to participate in SMB financing in a way that simply wasn’t possible before, and a critically important way for small and medium businesses - potentially across the world - to release their working capital.”
LocalGlobe’s Robin Klein adds: “AREX are yet another example of the ambition and brilliance of execution so evident in the Nordic fin-tech sector right now. They are a team with proven pedigree and a huge mission in a market that’s poised for enormous change - and we’re very excited to be working with them.”