Working Capital Tools for Vertical SaaS: An Interview with OatFi’s Mike Barbosa

Mike Barbosa is CEO and Co-Founder of OatFi. OatFi provides the end-to-end infrastructure for B2B Payment and Vertical SaaS platforms to embed and monetize working capital tools for commercial end users. Through an integration with OatFi, SMBs are empowered to collapse their cash flow conversion cycle, and platforms receive a new, high-margin revenue channel at zero-added risk

FRACTAL: Tell us about the embedded lending ecosystem. What sorts of technology solutions are involved and where does Oatfi fit into that ecosystem?

Mike: The embedded lending ecosystem allows software companies that aren’t traditionally lenders to offer and monetize credit products. Across the ecosystem, you can break the main players into two categories, with some crossover depending on product strategy: infrastructure and embedded lenders.

Infrastructure companies provide tools that enable SaaS companies to build their own products. These companies serve functionality across the credit stack, including Know Your Business (KYB) , underwriting and risk decisioning, ledgering and loan ops, capital markets, collections and servicing, and risk management. While each piece of infrastructure serves its own niche, there is a considerable operational lift to manage the workflow owned by each category of vendor.

Embedded lenders are companies that provide a holistic product offering for SaaS companies to deploy credit. We can bifurcate this category into two groups: those that manage the UX/UI and those that don’t. Within the first category, some require their brand to be seen, and some do not (think Affirm vs. Lendflow). For the embedded lenders that don’t provide the UX/UI, SaaS companies are empowered to build their own offering on top of the lender’s credit stack.

What problems are embedded working capital tools solving? Please give an example (hypothetical or real) of how this kind of infrastructure helps a SaaS company.

The most critical problem for businesses is cash flow. The unfortunate reality is you can have an amazing gross margin, but if you don’t have cash available you’re going to have a very hard time running and growing your business. Oftentimes, the cashflow problem is not uniform across industries and is dependent on supplier or buyer-specific payment terms.

Offering both embedded accounts payable and accounts receivable solutions empowers businesses to solve their cash-flow-conversion cycle no matter where the issue lies. — Embedding working capital tools into SaaS offerings enables companies to choose how and when they want to pay and get paid. It eliminates mismatched terms. Here are two examples of how that works:

Accounts Payable Example: Assume you are a SaaS solution serving the needs of the security guard-staffing industry. The biggest issue for many of your users is payroll. While payroll at most companies is biweekly, this cadence can be difficult when customer invoices are paid 30–60 days after service completion. This scenario helps us understand a common mismatching of payment terms (i.e., when cash comes in the door vs. out the door). If this staffing firm is able to access an AP financing tool, they can align their payroll expenditures with their incoming revenues. In this case, the staffing agency is able to solve their working capital issue by extending their days to pay, otherwise called their ‘Days Payable Outstanding.’ For most businesses, the higher this number, the better!

Accounts Receivable Example: Looking at the same staffing company, we can view the mismatched payment terms from their accounts receivable where they have to wait 30–90 days to get paid. The number of days they wait for outstanding receivables to turn into available cash is called ‘Days Sales Outstanding.’ Businesses typically want this number to be as low as possible. These receivables are typically paid for jobs and services already completed, but since industry-wide payment terms are net 30–60 days, staffing companies are forced to cover operating expenses from their cash on hand. This is where an AR financing tool can be offered. Embedding a factoring-like product into this SaaS solution allows staffing companies to receive funding upon invoice creation and access the cash needed to fulfill their biweekly payroll and operating expenses.

In terms of the kinds of SMBs that our vertical SaaS companies are serving, are there certain types of customers or industries that particularly benefit from this kind of solution? What are their characteristics?

Most SMBs face cash flow issues, which means the need for working capital tools industry agnostic. Whether it’s because of industry standard net-terms, build time, or project length, cash flow issues can affect businesses of all shapes and sizes.

How do embedded working capital tools enable loans without requiring SaaS companies to create a credit product? How does this work on the backend? What is the integration load for a SaaS company’s engineers?

Embedded working capital tools aim to package the intricacies of a credit product into API and SDK integrations. Depending on the lending platform’s APIs, these integrations can be completely white-labeled to the SaaS platform or alternatively branded as the lending partner, introducing an additional workflow. For example, here at OatFi, we enable SaaS platforms to build their own product offering from a UX and branding perspective, while we own the lift of originating the loan both from a technical and capital markets perspective. In our case, OatFi is the lender of record. So when a SaaS platform’s user takes a loan, they are not borrowing from that SaaS company, they are borrowing from OatFi.

On the backend, most embedded lenders originate a loan by receiving data for underwriting through a hosted onboarding flow surfaced by an i-frame, while other platforms — includingOatFi — leverage APIs to retrieve this information. This data is then able to fuel near-instant underwriting decisions, which are then sent back to the end-customer through the SaaS platform’s interface. Finally, once lending terms are agreed upon, funds are either pushed out directly from the lending partner or pushed through the partner platform onto the end-customer.

What should a vertical SaaS founder consider before they decide if this kind of tool can help their business?

Vertical SaaS founders know their respective industries inside and out, so no one is better equipped to understand the nuances of their customers’ cash flows. If a lot of discovery calls with your customers revolve around the time-lag when making payments or getting paid, embedded lending needs to be on your roadmap. Embedding both payment and lending functionalities at once helps founding teams differentiate themselves from the market and hit the ground running with a full suite of fintech offerings.

Why is embedded working capital a high leverage tool for vertical SaaS companies in particular?

Working capital tools like OatFi give vertical SaaS companies a 100% gross margin revenue stream, while empowering your SMB customers to operate more efficiently. By embedding payments and lending products directly into your platform, SaaS companies can increase user retention as they capture more of their customer’s workflow.