Online or off, the fundamentals don't change - Brief Article

Railway Age, August, 2000 by Brett N. Silvers

Railroads are among the many industries joining the Internet-sparked business-to-business (B2B) electronic revolution. Currently, railroad buyers, suppliers, and contractors can take advantage of electronic transmission of bids, purchase orders, blueprints, and documents, as well as auction sites and bulletin boards. They can even obtain financing online.

Just as railroads helped bring about the industrial revolution, the Internet is revolutionizing commerce once again. The growth is staggering. In 1999, B2B e-commerce totaled $130 billion in transactions worldwide. The Gartner Group projects that global commerce conducted in e-business marketplaces will surpass $7.3 trillion by 2004. What will drive business people to log on and take part? From the media attention generated by e-business, one might conclude that it's a passing craze, unlikely to meet a fraction of present expectations.

If companies are expected to conduct business online successfully, they must mimic the tactics learned by doing business off-line. Access to financing is fundamental to both ends of the sales transaction. Sellers need credit to produce the goods; buyers, to purchase them. If 17% of U.S. sales take place on the Internet over the next four years, as has been predicted, many of these sales will require financing, particularly for small and medium size industrial companies.

Today there are approximately 700 e-business marketplaces where companies can meet, negotiate, buy, and sell online, with the number expected to grow to 1,000 by the end of this year.

One breed of e-commerce marketplace that can offer commercial financing and other advantages for industry is the "neutral" marketplace. This model is operated by independent dot-com portals that link up buyers and sellers within a specific industry (a "vertical community").

Neutral marketplaces are keenly aware that financing, as a form of content, is key to attracting buyers and sellers to transact business on their sites. Financial partners offer marketplaces a powerful tool for boosting site traffic and attracting loyal members. The credit provider, however, needs to observe e-business basics:

* A site should have all the essential financial products "on the shelf" for enabling e-commerce: basic working capital lines, equipment loans and industrial mortgages, and sophisticated international trade, barter, and energy financing programs.

* Most small and medium size companies that apply for commercial credit have a "story" to tell. Credit may be used to power a new initiative, take a stand against competitive pressures, end a sales slump, or upgrade energy systems. Good credit providers understand these stories and incorporate them into lending decisions.

* Online lenders must be able to underwrite loans no matter where in the world an applicant is located, how complicated the loan request, or how interesting their story. Assessing an applicant's creditworthiness is a challenge on the Internet. It's a global network with invisible borders between nations and economies.

* No matter how fast information flows, an underwriter still needs time to interpret the accounting and financial standards that apply to each transaction. Every country has its own requirements. Shared global standards for many basic commercial procedures do not exist. For example, in many jurisdictions, people still need to sign on the dotted line with ink to secure an agreement. Electronic signatures generally remain unenforceable (although the U.S. Congress took a big step forward in June 2000 when legislation was passed validating e-signatures).

* Concern for security deters companies from disclosing financial information online. To be successful, online financing partners should offer logical product screens and easy-to-use applications, where credit data can be securely transmitted.

The current reality is, without a stamp, most small and medium size companies applying for credit have no way to submit corporate financial information online. Many business documents are not yet Internet-friendly. Two forms of online credit have emerged to support small and medium size companies doing e-commerce. One is an "instant" credit-card type of transaction that uses personal financial data from business owners to credit-score loans up to $100,000. Another approach, which more truly mirrors classic commercial and international lending, bases credit decisions on a corporation's financial information, and permits loans up to $5 million.

Instant online financing for million-dollar B2B transactions is still to come. I would argue that the skeptics have it all wrong. Financial innovators break new ground every day, bringing the business world closer to routine Internet-based deals--at the click of a mouse.