Say what you want about Mark Zuckerberg, the guy is very smart. He also knows how to play the game.
A hot topic of late is minority and female owned business. The idea is to get more support, especially financially for them. Just like the ESG investing, people like to bring their social movements into the business and investing world. Major corporations are, of course, brought into the fold by suffering negative publicity if they do not participate.
Presently, ESG is all the rage. This is really affecting portfolios with money managers all jumping on board. Of course, this is nothing new. We saw this in the past as these types of pushes are made periodically. The reason why they fail is money needs to generate a return. If it does not, investors are unhappy. For example, do you think that retired school teachers will accept having their pensions cut due to lackluster returns? After all, we did invest in social conscious projects.
Of course not. While people care about different issues, when it comes to money and having their returns cut, money managers are given a short leash. If the returns are not there, the money they are managing starts to dwindle as investors pull it.
Getting Money Into People's Hands
There is little doubt, the way to grow an economy is to get money into people's hands. This is something that many overlook. Nevertheless, since there is a lending coupled with a USD crisis, people will realize soon enough what happens when money does not flow into the economy.
Getting money into the hands of minority and women owned businesses can be a profitable endeavor. Many have the ability to produce returns and grow, just like any other business. In addition, most small businesses tend to suffer from cashflow issues. It is simply the plight of companies that do not have the revenues along with profitability to have a tremendous war chest.
Enter Zuckerberg and his white knight approach. Make no mistake, this guy is very accustomed to controversy and Facebook seems to be getting deeper into it. That said, Zuckerberg is able to read the political and social environment. Hence, he is taking advantage of the present winds to garner himself some good publicity.
Here is what Facebook is doing according to an article put out on CNBC:
Facebook this week announced a $100 million commitment to a program that supports small businesses owned by women and minorities by buying up their outstanding invoices.
That is very generous of the company. Facebook is going to give 30K small business money from the $100 million is earmarked for this project.
Who is going to object to that?
The reality of the situation is that most people will not understand what is taking place. To get an idea, let us delve further into the article.
Businesses can submit outstanding invoices of a minimum of $1,000, and if accepted, Facebook will buy the invoice from the small business and pay them within a matter of days. The customers then pay Facebook the outstanding invoices at the same terms they had agreed to with the small business. For Facebook, which generated nearly $86 billion in revenue in 2020, waiting for payments is much less dire than it is for small businesses.
So as we can see, this is not Facebook giving these small businesses money to pay the invoices they owe. Instead, it is payment on invoices that are outstanding to the small business. This is a huge difference.
Buying Of Receivables
This is a practice that is known as "buying up receivables". Anyone who fell behind on some bills will know about this.
Companies often sell receivables owed to them to entities that specialize in collecting. This is what is known as "being turned over to collections". While it is not known whether Facebook is buying up presently due receivables or ones that fell behind, all is not what is seems.
The key to understand is that the purchase of the outstanding receivables is done at a discount. Of course, the amount discounted depends upon the type of receivable and how likely the companies doing the purchasing are to collect. The more out of date, ie further behind, the less money paid.
Make no mistake about it, this is big business. Companies often purchase these receivables at a significant discount. That is why people receive those letters offering a big reduction for immediate payment. If the company got the invoice for 25 cents on the dollar, they can easily come out ahead if they slash the amount owned by 50%.
This is precisely what Facebook is doing. They are not donating $100 million to minority and female owned businesses. Instead, they are buying up receivables at a discount and will become a collection agency. This is an interesting twist because it is easy to imagine any company that does not pay Facebook the money owed will have their accounts closed down. If this is a serious part of their business, it could really hurt.
Here we have to give some kudos to Zuckerberg. By digging into their cash holdings, they get some great PR. Odds are they will make back every penny spent on the project and then some. Facebook has a lot of ways to leverage companies that owe the outstanding debt.
Certainly they are providing a service to these business. There are, however, companies out there that already do this. Is Facebook offering a better than market rate on the receivables? We cannot answer that question.
Nevertheless, Zuckerberg is simply providing a service albeit one that is highly targeted. At the end of the day, he is going to get the PR out of while also likely turning a profit.
Most will just read the headline and believe that Facebook donated $100 million to minority and female owned businesses. That is not the case but few will take the time to figure it out.
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