In the past, we've covered technical details on how fintech borrowers should think about using software to simplify complex debt capital operations and handle debt capital compliance. Here, we'll dive into the business case for debt capital management software, and how to calculate return on investment (ROI) when considering or selecting a new capital markets software solution.
The first thing to consider is how your company thinks about technology investments. Does it prioritize headcount saved? Transactions accelerated? Business risk reduced? These are common categories of software value, but they're not the only ones.
Some business leaders focus on the current opportunity costs of manual or low-value work, as well as the less tangible cost of having to train and ramp up new team members in the event of turnover. These costs and benefits are harder to compute, but no less real.
Regardless of how your company measures value, it can be helpful to take stock of how different stakeholders across your organization think about value before diving into vendor selection. That way, you can make sure you're applying consistent evaluation criteria and sources of value for the components of your capital markets technology or lending technology stack.
Our recommendation for calculating capital markets software ROI is to add up the value you expect to derive from these three categories: revenue increases, cost reduction, and risk mitigation. Different companies may assign different weights to these categories, but they tend to be the ones that rise to the top. We dive into each category below.
How can debt capital management software help you reduce costs?
While capital markets technology is still nascent, most vendors in the space focus primarily on process automation, whether in automating capital markets reports or streamlining routine borrower-capital provider interactions.
In the credit facility management context, a significant portion of cost reduction can be measured by estimating the time a CFO or financial analyst spends preparing draw requests, monthly reporting, and other capital provider deliverables on a regular basis, and then assigning a value to that time. We've found that routine credit facility management tasks typically require several dozen hours a month, even for highly experienced finance team members.
Time spent preparing capital provider reporting is a key source of cost reduction, but it's not the only one. Debt capital management software also helps you cut down on time spent coordinating tasks, gathering information, or engaging in back-and-forth on data accuracy, whether with internal teams (e.g., Accounting) or external parties (e.g., verification agents). In other words, capital markets software can reduce costs by centralizing data and communications, in addition to automating routine tasks.
How can debt capital software help you increase your net interest margin?
Fintechs generate revenue from a variety of sources (e.g., interchange for credit card startups, net interest margin for embedded lenders), so it's difficult to adopt a one-size-fits-all explanation here.
Still, as we covered in our deep-dive on fintech cash flows, fintechs often make money on the spread between the rate at which they can access capital and the rate at which they offer capital to their customers.
When calculating ROI for a capital markets technology solution, then, fintechs should pick a funding KPI (e.g., effective interest rate or advance rate), estimate the lift that a software solution can provide in that category, and then calculate the downstream effects that that improvement will have on their business.
How can debt capital management software help you mitigate risk?
One of the most significant risks for any fintech startup is losing access to their revolving credit facility, as this is likely to grind their operations to a halt. This loss of access can happen, for instance, when borrowers trip a financial covenant.
A simple formula for sizing risk is simply to take the value of money jeopardized in a risky scenario (e.g., the size of the credit facility) and multiply it by the likelihood of that scenario happening. It follows that borrowers can calculate the value of risk reduction by assigning a risk reduction value to software (e.g., does this software make it 5% less likely that I will trip a covenant, and thus maintain access to my credit facility?).
In our experience, this exercise does a good job highlighting the importance of thinking through capital markets risk, but tends to be the least scientific of the sources of capital markets software value. It's simply too hard to quantify the likelihood of, say, tripping a liquidity covenant or tangible net worth covenant.
Even so, going through the exercise can be a valuable reminder of the existential nature of prudent debt capital management.
Want to learn more?
There are many potential sources of value from a debt capital management solution, but no two startups have the same capital markets priorities and operational challenges. That's why a bottoms-up assessment of the potential ROI from a capital markets software solution is a useful exercise for startups considering implementing a solution like Finley.
If you're interested in learning more about software that can help you scale your capital markets function and ensure debt capital compliance, just request a consultation with a Finley debt capital expert and we'll be in touch!
