Deal Radar 2009: FTRANS

FTRANS provides accounts receivable outsourcing and credit management solutions. It helps small companies manage their accounts receivables so they can have greater access to working capital and increase their cash on hand. The Atlanta-based company focuses on outsourcing the accounts receivables (A/R) of small and mid-size businesses.
To use the FTRANS web-based system, SMBs initiate and submit customer credit requests and submit customer invoices online. FTRANS verifies and transforms the accounts receivables into transparent and lendable collateral for banks to lend against. It enables complete visibility of invoice payment remittances, payment matching, and lockbox collection activities. The end result for the SMBs is more capital availability, a faster payment cycle at a reduced cost with far less risk.

FTRANS was founded by Chairman John Hayes, who has over 30 years of experience in developing technology-based companies. Hayes was co-founder and president of the company that built Peachtree Software products. He also co-founded Comsell, an early producer of interactive technology which was sold to News Corporation. John founded Interactive Health Network/GeoMedica, a producer of health-related interactive online products, which was sold to Reuters. In 1997, he founded OneCoast Network, which was sold to Internet Capital Group in 2000. FTRANS CEO Dan Drechsel joined the company in 2008 and also serves as a member of the board of directors. He has over 25 years of experience in sales, operations, and technology in senior management positions. Drechsel joined FTRANS from SAP, where he was general manager of the company’s banking business in the Americas. Prior to working at SAP, Drechsel was president of Global Energy Decisions, a data and technology provider, and president and COO of S1 Corporation, a technology solutions provider for financial institutions. 

Since its founding in 2004, FTRANS has raised a total of $18 million: a $2 million Series A, a $7.5 million Series B and a $10.5 million Series C from Total Technology Ventures, New Atlantic Ventures, and Greenhill SAVP. FTRANS is not on the lookout for additional funds at present. 

Before founding FTRANS, Hayes was consolidating supply chain intermediaries and noticed that there was a huge disparity between the use of financial institutions for consumer and trade transactions. Ninety-eight percent of consumer credit was managed and funded by financial institutions, mainly via credit cards, while for SMBs the figure was less than 5%. Credit management was dominated by credit terms to buyers. Hayes felt that with his experience in understanding financial flow in individual businesses and the economy as a whole, he would be able to construct a system that would overcome objections by both financial institutions and individual businesses.

Most SMBs are forced to fund their customers’ purchases through the extension of favorable payment terms. As a result, for businesses, accounts payable (trade credit) is one of the largest sources of capital in the United States. These business-to-business transactions represent over $8 trillion in annual sales volume. Assuming an average of over 50 days to collect payment, this sales volume translates to approximately $1.2 trillion in accounts receivable, nearly all of which is self-funded by businesses. This is a large debt in the US economy not managed by financial institutions.

When SMBs outsource their receivables with FTRANS, the bank has high visibility into their customers’ A/R. As a result, this becomes low risk, lendable collateral for the bank, representing an opportunity they can capitalize on while driving increased commercial deposits and loan growth.  This is a strategy most banks are pursuing. Since credit contraction is one of the effects of the current shaky economy, borrowing has become restricted to very creditworthy projects. Turning A/R into collateral means that SMBs have access to a source of capital that was previously unavailable.

FTRANS has partnerships with banks and other financial intermediaries, which enable them to see all the transactions in the companies’ receivables and understand their credit quality, enabling the financial institutions to more efficiently lend against the A/R as collateral. Thus SMBs can get paid for their invoices in less than four days rather than the usual 30 to 60 days.

The total addressable market for FTRANS is made up of SMBs in the US with annual sales under $200 million. These businesses sell more than $8 trillion goods and services to other domestic businesses and governments annually and self-fund these transactions at $1.2 trillion, annually. Firms with over $200 million in sales have greater access to reasonably priced capital and can operate credit systems for just about 2% of sales while smaller firms may spend 3%-5% to operate credit systems. FTRANS sees an opportunity to move this financing to financial institution, such as banks and thereby facilitate more efficient access to capital for SMBs.  

Previously, businesses had the option of hiring factors to loan them funds against their receivables. But the interest rates associated with these transactions were often 30%-40%, making this a last resort for companies in need of funds. Now SMBs have a few different options. They can use the services of FTRANS or can list their A/R on a site like Receivables Exchange, which is often called ‘the eBay for Receivables’. Here lenders bid on the receivables, loan the money and take a cut when the bills are finally paid. The lender’s fee is generally 2%-4%. Another company, PrimeRevenue, works in a different way: They team up with big players like large car companies or retailers and through a network of bank partners, provide the money owed to the small suppliers.The fee charged is generally under 10% annually and includes both PrimeRevenue’s and the bank’s fee. The large company must tie up with PrimeRevenue and initiate the process. Another company, SmartFundIt, helps SMBs find financing by acting as an exchange for financiers and the businesses. The underlying success factor of all these companies is the option to use the financing only when required for far less than what it would otherwise cost. We have previously covered Bill.com, but this company is more focused on helping SMBs to send, receive, route and store bills. It handles the Accounts Payable side of a business while the A/R portion is still untapped. 

The broad segments FTRANS targets are manufacturing, services and wholesale distribution companies with revenues from $250,000 to $250 million, with a narrower focus on companies with revenues of $1 million to $40 million. From the start, FTRANS partnered with the bank Synovus, an early innovator in the credit card processing space. The company has also partnered with other smaller, community-based banks to gain access to their customers. It recently signed six new bank partnerships and has expanded its non-bank distribution channel through integrations with Peachtree Accounting and ServiceChannel, the leading vendor management provider to the retail industry. FTRANS has over 300 clients and 17,000 buyers in all 50 US states and 34 countries. Although revenues are undisclosed, FTRANS expects annualized revenue growth to be around 100%.

The company plans to continue partnering with financial intermediaries looking to sell to SMBs, as well as with non-financial SMB aggregators to offer its solution within their distribution channels. As Drechsel says, “We are planning for a long future — we are still focused on growth, not exit.”

Recommended Readings:
Making SMEs Run Smoothly: Rene Lacerte’s Cashview
Protect Your Dilution – Justin Floyd
Deal Radar 2008: PayCycle

This segment is a part in the series : Deal Radar 2009