For anyone involved in receivables finance, last week’s trading update from Tungsten offered some interesting snippets to consider and as an early-stage equity investor in the invoice trading and supply chain finance provider Platform Black, I count myself among those who have a particular reason to monitor developments in this market.

Tungsten is a fascinating company that has been assembled by a series of acquisitions. At its core is Tungsten Network, an electronic invoicing system that links large companies and their suppliers in countries round the world. Alongside this sits Tungsten Bank, a specialist UK lender that advances short-term funding to these suppliers against e-invoices that have been approved for payment by large corporate customers that use Tungsten Network. In a nutshell it’s classic supply chain finance: once the large corporate buyer has approved the invoice and undertaken to pay on a fixed date the smaller supplier can secure immediate funding against that approved invoice, thereby improving its cash flow and working capital position. The trick is that the supplier will tend to be able to access cheaper funding this way because the finance provider will base its risk assessment on the credit rating of the large corporate buyer, rather than the smaller company supplying it.

The bonus for observers such as me is that Tungsten is quoted on ’s Aim market and so has to publish trading and financial information regularly, which helps to shine some light into a market dominated by private companies and divisions embedded within larger groups.

What particularly caught my eye last week was some early figures on how Tungsten’ supply chain finance operation is doing. Tungsten Early Payment is still in its infancy, having launched only at the end of last year. By April 30, 188 suppliers who send electronic invoices via Tungsten Network had signed up to use TEP but only 38 were live due to what Tungsten founder Edward Truell calls “excessively onerous processes and excessive delays between signing the contract and being allowed to press the famous button to get the money”. These processes are now being streamlined to remove a mandatory three-month grace period between signing up and financing your first invoice. “We’ve imposed on ourselves some excessively conservative policies,” admits Truell.

So far, TEP says it has funded invoices from these 38 users worth a total of £32m and that the rate of usage is encouraging – they finance 79% of the value of their available invoices on average. Larger companies that use the service pay about 4.5% annualised on average, while SMEs pay 12.4%, or about 1% a month.

This all sounds promising. But to my eye there were two important caveats in the Tungsten figures that I suspect will ring true to many in this part of the alternative finance market. The first is that Tungsten has found marketing TEP to suppliers and on-boarding them harder and slower than anticipated – its conversion rate so far among suppliers targeted to sign up to TEP was 6.6%.

“The sales and enrolment processes take longer than desireable; require more sales people and marketing resources; and need a simpler supplier financing approval process to gain traction,” the company says. “We have hired Early Payment sales people, plan to increase the marketing budget in the current financial year, and are simplifying and shortening the process for suppliers to be approved for Tungsten Early Payment.” So even when your borrower origination comes via an e-invoicing network, which in theory should make attracting customers more straightforward, it still involves plenty of time, effort and money.

Second, it is clear that “cash drag” in receivables finance is a challenge for everyone. This term refers to the quantity of money that is available at any moment to finance invoices but remains unused. If investors are not able to advance all the cash they have committed, the lack of return on the unused portion will dilute their overall yield, sometimes in a big way. This is clearly an issue for Tungsten. The trading update reveals that Tungsten Bank has recently decided not to start accepting deposits as had been the plan. Tungsten already has access to all the cash it needs to finance invoices, thanks in part to a funding commitment from Insight Investment Management, an asset manager owned by The Bank of New York Mellon. Adding bank deposits at this point would risk driving down net returns.

It all goes to show that even for Tungsten, scaling its origination remains the most pressing challenge. There is no shortage of cash available to lend.