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    Default Lead Gen and Payment System Idea

    Hello everyone,

    Long time lurker, first time poster. I work as a sales rep, mostly dealing with suppliers in automotive.
    Recently I met a young business owner at a rotary lunch. He runs a 4 man shop and was asking for advice on dealing with net 30/60/90 payment terms. They've only been in business for a few years and were running into cash flow issues trying to expand.

    During my talk with him, I had an idea hit me that I was hoping to run by some of you guys.

    What if there was an MFG like service that was free to use and access, but only incurred a transaction fee when a proposal went to production. You then get paid up front to your bank account(example, say 80% or 90% of the invoice up front) and your customer pays the site where the remaining amount gets sent to you and a fee is taken out with a CC, ACH, wire, etc.

    The site is limited to US only companies, so no competing with Mexico or China, and is enforced with a floor on labor costs that match the business locales' minimum wage laws. Think of a similar website set up: drafts are uploaded, materials specified, etc

    RFQ goes out, there are bids, select something you like, done.

    Like ebay, there would be a penalty for people who place an RFQ but then never do anything to discourage that activity.

    The transaction fee is 1% every 10 days up to a maximum all the way up to 180 or even 365 days. I envision it as a, "free to find leads with transactionally charged accounts receivable/payable management".

    Excluding potential issues that the site would have to deal with (non-payment/non-delivery), would such a service be of any interest to shop owners?

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    That sounds great, but I do have two concerns.

    ONE - There are work hubs out there, like Xometry, which provide explicit payment terms. So in some ways the idea is redundant.

    TWO - The big issue with those RFQ hubs (from the supplier perspective) is that it makes it so easy to shop around, that customers become extremely price-sensitive. Those of us who participate in the online mass RFQ market run the risk of commoditizing manufacturing services.

    Not saying it can't work. I just have reservations about anything that makes it too easy for all the work to funnel into shops that are misquoting, or working for peanuts.

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    Quote Originally Posted by boosted View Post
    That sounds great, but I do have two concerns.

    ONE - There are work hubs out there, like Xometry, which provide explicit payment terms. So in some ways the idea is redundant.

    TWO - The big issue with those RFQ hubs (from the supplier perspective) is that it makes it so easy to shop around, that customers become extremely price-sensitive. Those of us who participate in the online mass RFQ market run the risk of commoditizing manufacturing services.

    Not saying it can't work. I just have reservations about anything that makes it too easy for all the work to funnel into shops that are misquoting, or working for peanuts.
    Hey boosted, thanks for the post.

    I'm familiar with Xometry as well as the other hubs out there.

    Your reservations I agree with entirely but I think I might have an answer for that. My friend who I ran this idea past is an engineer with a coding background. We were spec'ing out a way to prevent that same issue by protecting businesses who have valid certs but also have a track record of business success. He's coded a way to balance a quote against factors beyond price using data gathered from a QA system he built.

    I think there's a way to work this so that way you guys aren't commoditized, have clear dollar amounts of what the costs are (unlike xometry), and flexible payment terms. Frankly price isn't the be all end all especially when campaigns begin to rise above 1k+ widgets or into several million dollar contracts.

    The other thing to is, I believe Xometry only allows for net 30 and limits runs to 10k. I'm proposing you get paid up front with flexibility for your customer to pay up to 365 net for example.

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    Am I following correctly that this proposed service is also financing these transactions? Supplier is paid upfront, purchaser can get net 30 still? Where does that money come from in the meantime?

    That sounds great for the users on both ends, but like an absurd risk for a business. Essentially providing the purchaser a loan to pay the supplier up front. Loan $1k for 30 days, and for a return of $30.30 at that? I wouldn't expect much longevity out of that model.

    Unless I misunderstand?

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    Quote Originally Posted by johfoster View Post
    Am I following correctly that this proposed service is also financing these transactions? Supplier is paid upfront, purchaser can get net 30 still? Where does that money come from in the meantime?

    That sounds great for the users on both ends, but like an absurd risk for a business. Essentially providing the purchaser a loan to pay the supplier up front. Loan $1k for 30 days, and for a return of $30.30 at that? I wouldn't expect much longevity out of that model.

    Unless I misunderstand?
    You understand correctly. The concept is known as invoice factoring. The money can come from traditional banks, accredited investors, or in the case of one company I looked at cryptocurrency.

    There are a lot of ways to mitigate risk. The engineer I mentioned earlier and I spent a whole day brainstorming ways to prevent loss from insurance to QA audits and certifications for large dollar projects.

    Think of it from the perspective of an investor. I have $1k that I want a return on. I can leave it in my checking account for .25% , park it in t-bills for 2%, or give it to DrBeast for 3% and in 30 days, get it back.

    The numbers start to become a lot more attractive when net 60, 90, etc come in.

    I think there might be a niche to be filled here. Let me get something built with a funding ceiling (to start), a forum sponsorship, and sharpen it with feedback from the community.

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    Quote Originally Posted by DrBeast View Post

    Think of it from the perspective of an investor. I have $1k that I want a return on. I can leave it in my checking account for .25% , park it in t-bills for 2%, or give it to DrBeast for 3% and in 30 days, get it back.

    The numbers start to become a lot more attractive when net 60, 90, etc come in.

    I think there might be a niche to be filled here. Let me get something built with a funding ceiling (to start), a forum sponsorship, and sharpen it with feedback from the community.
    Because your office front winder don't have an "FDIC Insured" sticker on it ?

    Because you get 3% to hand back in 30 days from where ?

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    Regions bank does something like this, at least I think I have my head around what your're trying to do. Back in 2006 just before the economy tanked a lot of the big factories in my home town in Cleveland Tennessee sent out letters of intent to pay net 90. Big Companies like Maytag, Whirlpool, M&M Mars, Olin Chemicals, and several others. Here comes good ole Regions in telling all us shop owners they had a system that the supplier could bring in the signed invoice and even though the terms were net 90 they would deposit the invoice amount minus 3% before 2pm the next business day. A lot of people jumped on that wagon and did pretty good, in fact saved a lot of shops and industrial suppliers.

    Only problem I saw with the whole thing is a couple started shell companies and started kiting invoices. Small town fraud is just a slap on the wrist.....

    I'm interested to see where this goes though.

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    Okay. So then you are talking about becoming a lender, or creating a platform that connects lenders with invoice financing deals in the manufacturing sector?

    I know invoice financing is not uncommon, but from banks who are "regulated" and insured against losses. Lenders who give out non collateralized loans likely don't care about anything other than your credit history, and past cash flow records. I also don't forsee other lenders financing money for you to become a lender.

    The platform that connects lenders to parties looking for a invoice financing loan, and in turn charges a service fee, could possibly work. Though I don't think it is the vendors and purchasers that will need your convincing, because it is obviously win/win there. The parties at risk in financing are the ones putting up the funds, and that is who needs to be on board for a business like this to be thought about in my mind. Though you also need to prove how you will provide a lot of real value in the form of mitigating risk, for someone to see a need for you as a middle man in the financing process.

    There are lots of banks who already provide these services, and businesses who need the service..know that they need the service..and will find the banks. So what value is added by you being in the middle of this, that makes it worth paying more for the loan?

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    Quote Originally Posted by johfoster View Post
    Okay. So then you are talking about becoming a lender, or creating a platform that connects lenders with invoice financing deals in the manufacturing sector?

    [...]
    So what value is added by you being in the middle of this, that makes it worth paying more for the loan?
    Getting too stuck in the weeds, let me better explain:

    In its simplest form, think an "eBay - Paypal" like service for you guys where a buyer posts an RFQ (with payment terms they're comfortable with), suppliers bid on it, and then when an RFQ is selected, the winning supplier gets paid 80-90% up front with the remainder being paid out when the customers pays at the end of the payment terms minus a transaction fee for using the service.

    Your concerns about risk are my blind spot. I gave a call to a friend of mine who does construction financing to see what his thoughts were given those very issues you mentioned. He's given me some stellar advice on how to work with that and avoid it.

    I put my engineer friend and my finance guy in a room recently and they both came up with some absolutely inventive ways to eliminate the invoice kiting issues, non-payment, and even the commoditization issue mentioned earlier. I don't want to spoil the surprise, but it the nuts and bolts are looking feasible.

    My original question was to find out if there's a need and a pain point. Businesses want leads and don't want to pay up front subscriptions to get them / avoiding commoditization. Customers want to easily find established businesses capable of meeting their needs with flexible payment terms.

    Let me know if this makes sense.

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    What has been described here sounds exactly like my Line of Credit from the bank. I can just go to the bank and show them a P.O. and get the money I need for supplies and payroll, etc. Just pay interest on the balance until the invoice is paid and clear the debt. Been this way for over 25 years.

    It works in reverse too. Have your customer take out an L.O.C. and have them pay you in 30 days. Let them take the extra time to sell there product and pay back there debts.

    If they dont want to do this then go out and get other customers. If they cannot pay in 30 days they most likely are on bad financial grounds. You dont want to wait around until it fails and you get stuck with the bill.

    I understand not everyone has the credit to do this. There is a saying that goes "in order to get a loan you have to prove you do not need one." This may be hard to hear when your in financial trouble but it is how companies stay solvent and protected.

    Expand slow and steady. Too many problems happen when people jump the gun and think they are missing out on work. if you have to pass on jobs look at the bright side of things. You are now available for the next job that comes around instead of in a jam.

    Slow and Steady wins the race.

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    However workable this 3rd party service becomes, I'd be concerned about it's long-term life.

    You connect customers to supplier shops, and for a while things are going well for the 3rd party service. Until the connections are made and a good supply base is established, and then there's no longer a need for the 3rd party service.

    I also only see this being viable for small shops & new-to-the-market customers. Established customers know who their target suppliers are. Established suppliers know who their target customers are. You may get lucky on small-mid size companies looking to supplement 20% of their needs, but rest assure that the 80% of their needs are locked down already.

    You will literally have to sell the hell out of this thing, full-time, forever, for it to have life.

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    Quote Originally Posted by DrBeast View Post
    Your concerns about risk are my blind spot. I gave a call to a friend of mine who does construction financing to see what his thoughts were given those very issues you mentioned. He's given me some stellar advice on how to work with that and avoid it.
    .
    There are lots of factoring companies, you're not going to be capitalized well enough or have the back end system for it, at least initially....so maybe sell them, factor them yourselves? By consolidating you'd get better rates.

    Risk for a deal like this has a strata, i.e. how excited you get a lender will depend on how much money there is in behind them (i.e. equity). I would come at with a 'pass the hat' type debenture, keep he equity and try and raise a few million (or few hundred, whatever you can do) through individuals offering it trust like a entity (i.e. set up a lending vehicle that is secured) with first place GA security on the assets. Give them 12% instead of what the bank gives (but the 12% clock is ticking whether you've got the money out there). You might have to even offer higher rates, it'll seem very risky to investors - essentially they will be unsecured creditors to the machines shops customer.

    The other thing you need to be able to quickly do is credit adjudication. You can't just factor any receivable and you'll get stuck with them if you can't quickly separate the wheat from the chaff. You could insure them, but that ads cost and time and again only a percentage will pass. Not sure how that is done instantly on a web form (but may it is done now)

    Overall as a business model, you're trying to get a pound of flesh from a race to the bottom industry - there's just not many points in it without extra charges. Despite what someone said in the other thread about the race having something to do with hourly rates, what the race is is a market whereby you only differentiate on price. Someone who does not have a unique offering, brand, special capabilities, no relationship with the customer and so on is the one most likely to participant. This is a problem in that there is little room for fees and well, desperate people do desperate things.

    Anyway, lots of great businesses happen because bright people overcome the challenges and craft an incredible new value proposition no one else thought, but those are the challenges I see off the top
    Last edited by Mcgyver; 09-14-2019 at 11:23 AM.

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    McGyver had it right.
    There is zero chance of this working unless You are Elon Musk and can raise 500M$ as an initial funding round based on Your credibility alone.

    Do the maths on a spreadsheet.
    2-x% of clients will not pay on time and will take 6-12 months to pay off their debt.
    1-2-3% of clients will never pay as they go BK.

    For an average float of 100.000$ per shop x 1000 shops, you need 100M$ of liquidity.
    A 2% delinquency rate on bk shops per year, very optimistic, means you need 20x100k = 2M$ / yr in extra marginal profits just to break even.
    Avg. lifetime of businesses is == 8 years == 12% / yr bk, netting 12M$/yr losses (perhaps partial).

    If/how much you re-insure your float your are cutting into your profit margins.

    At 2-3% per client rate // 60 days, 3-4% // 90 days, you are just barely breaking even on financials with zero costs to pay you, insurance, salary, overhead.

    There are endless ways to boost your profit margin by a lot.
    Slim re-insurance, partial payments (cashflow), using the float as a money-market account, bank partnerships, etc.
    Do You know how to do all above ?
    At market rates or better ?

    How much will a good money-market accountant cost you, about 7k$/mo at half day.
    Credit (re)insurance ?
    Making sure your funds don´t get cut off when you have a 3-4M loss in one week ?

    You will need to register as some form of financial intermediary.
    This is fine, and usually free.

    But unless You wish to be personally liable for direct and second party lossess and lawsuits, e.g. when some clients go BK, You will need some form of (credit)(liability) insurance.
    The insurance will then need processes, paperwork, auditors, the accountant / CFO signing off on the books, etc.

    None of the above is actually hard, technically.
    I/we did many similar businesses in the past.

    But You will need access to a pile of money, and the pile of money earns 2-4-6% risk free insured at the moment.
    So You will need to pay the pile of money more, typically about 10% net.

    It is perfectly possible to generate significantly more than 10% pa in the factoring game, if and when You create Your own dirt-cheap processes for all above and are very smart and hardworking and an IT expert or have expertise creating complex IT projects via outsourcing.

    I used to do all above as part of several projects.

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    Hello everyone.
    Thanks again for your feedback. It's reassuring that you guys have asked the same tough questions that I have which means I am on the right track.

    Part of my passion for this comes from hearing about the struggles of old friends of mine from high school who got into this game and hearing about their challenges in their own small businesses. I can see the same story here from many others.

    I've been around the block professionally in a handful of industries. I believe I have some answers to these questions (especially to the," how do you scale beyond SMBs), but they will need to be battle tested first.

    Ironically, finding funding isn't the issue.
    With that said:

    Quote Originally Posted by hanermo View Post
    It is perfectly possible to generate significantly more than 10% pa in the factoring game, if and when You create Your own dirt-cheap processes for all above and are very smart and hardworking and an IT expert or have expertise creating complex IT projects via outsourcing.
    No need for outsourcing. Stay tuned

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    So, You can find 100M$ in your cushions..
    and You have actual expertise delivering operational it systems in large scale.

    The second is harder than the first.
    It is extremely hard to make good large-scale reliable it systems, and unless you have done so you have no idea.

    Quote Originally Posted by DrBeast View Post

    Ironically, finding funding isn't the issue.
    With that said:

    No need for outsourcing. Stay tuned


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