Financing Digital Supply Chains

Editorial Board Member, Nick Stainthorpe, Partner at Reed Smith LLP London, described why advertising technology is considered an opportunity for niche lenders.

Advertising technology (adtech) is one example of a new online business sector which creates working capital mismatches. It refers to software which strategically places advertising on the web or mobile phones to target users with a particular profile or interest. Adtech is the reason why your browsing choices result in weirdly relevant advertisements appearing on your screen, from hotels in your next flight destination to music you like to listen to. Adtech software analyses browsing data or apps installed on a user’s mobile phone to understand the likely consumer behaviour of the user and delivers targeted content to their screen.

Adtech services and the advertising space where online advertising is placed, must ultimately be paid for by advertisers. Advertisers do not often liaise directly with online publishers such as news websites or portals i.e. the owners of real estate on the internet. Advertising agencies and adtech companies act as intermediaries. A typical supply chain stretches from the owner of the website or mobile app to the adtech provider to an advertising agency to the ultimate advertiser. Each link in this chain involves a supply and a related debt, with differing payment terms. The advertiser is making an advance payment to the advertising agency while the advertising agency needs about 60 days from invoice date to pay the adtech provider.

The adtech sector is dominated by Google. However, there are a significant number of small and medium-sized adtech companies, but these have a working capital problem. Advertising agencies are notoriously slow payers and some sit on cash provided by their advertising clients for significant periods of time. Website owners may expect payment within 5-10 days. Adtech companies are often fast-growing, ambitious companies with working capital challenges of their own and do not have the kind of trading history and tangible assets favoured by traditional lenders.

This sector has some advantages for lenders. Internet trading can often be clearly measured and audited, sometimes in real time. An adtech provider may have accounts receivable from a range of creditworthy advertising agencies and advertisers for services which are hard to dispute. There is little risk of defective products, returns or set-off (except for fraud). Invoicing and collection are likely to be highly automated and can easily be monitored by a finance provider.

Traditional business and legal structures can be applied to adtech financing. The receivables purchase approach has the advantage that it can be relatively easy to document and can give some benefits on the insolvency of a supplier or receivables seller. On the other hand, lending secured on accounts receivable gives the financier a clear and direct claim against the borrower as well as claims against the debtors. Both approaches are likely to require some form of notification to the debtors and/or registration in order to achieve legal robustness.

This product also brings challenges with it. Debtors are likely to be scattered across many jurisdictions and the contracts may be set out online and be subject to a variety of governing laws. This requires legal analysis on a case by case basis while knowledge and templates are developed by a lender. The location of the supplier/borrower should also be analysed from a tax and regulatory perspective. Lending to an English company, or buying receivables from it, is not a regulated activity. In Germany the opposite is true, while in the United States this can vary depending on the state the borrower is located in.

There are a number of players already tapping into these opportunities including BillFront, a Berlin- and London-based alternative finance provider, and London-based Moonshot Capital, which focuses on providing working capital for the digital economy (digital media and e-commerce).

In summary, Adtech creates opportunities for niche lenders who are prepared to analyse it.  This business line offers high returns relative to the associated risks.  Adtech is not the only internet-based product which creates financing opportunities. The mobile-app economy generates vast volumes of receivables. For example, Apple, Google and mobile-ad networks paid out US$88 billion to app developers in 2016. This number is set to more than double in the next three years.